Ride the Wave of Home Delivery with Supreme Industries

By Linda McDonough • July 7, 2017

Buy Supreme Industries (AMEX: STS)

Target: $27

Buy Up to: $19

Options Trade: Buy to open the September 15, 2017 call on Supreme Industries (AMEX: STS) with a strike price of $17.50 at $1.00 or lower. Symbol (STS170915C17.5)

*Please note- these options are very thinly traded so start with small lots and don’t chase the price. The last trade of $2.45 was way back on May 15th so that is not a current price.

Supreme Industries is sitting in the sweet spot of trucking. As a maker of truck bodies for smaller delivery trucks, it’s a back-door way to participate in the swell of demand for home delivery of everything from shoes to groceries.

The e-commerce explosion has caused kinks in the delivery system. While most e-commerce companies used to rely on FedEx and UPS to deposit packages on your doorstep, many are now looking for ways to control that last mile of delivery.

Small class 1-4 trucks are the perfect size to manipulate tight inner city corners and are just the right size to easily deliver mountains of small packages. Supreme’s expertise in customizing the boxes with refrigeration, cab access doors, and custom shelving make it the preferred supplier for companies looking to deliver a high volume of small packages (think groceries).

The small truck boxes that Supreme manufacturers sit on the chassis or the bones of a truck, a part supplied by its customers. A recent hiccup in the supply of these chassis weighed on earnings in the last six months. However, backlogged orders jumped 16% in the March quarter and management confirmed that all of the delayed orders will be booked in the next two quarters. In addition, the market is still growing-recent data from industry sources showcase mid-teens growth in class 3 and 4 trucks year-to-date.

Supreme has a clean balance sheet and generates positive free cash flow (cash left over after paying for capital investments like new factory capacity). After its poor first quarter, earnings should grow 14% for the balance of 2017 and 20% in 2018.

My $27 target is based on a price to earnings ratio (P/E) of 20 times 2018’s estimate of $1.38.

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John

07/07/17 ‐ 12:14pm ET July 7, 2017 at 12:14pm ET

Hi Linda

Excuse my ignorance but why is the strike price $9.50 off your target price? Thank you
John

WillW

07/07/17 ‐ 1:20pm ET July 7, 2017 at 1:20pm ET

STS is selling near its high for the day, just over $17. Linda expects the share price to rise to $27 in the future. For options traders, she is recommending the SEP 17.50 Call contract, so long as one can buy it for under $1. The option contract has two components: intrinsic value and time value. The terminology may be new to you. You might do some reading in the Investing Daily and other sources. Welcome to the club! The times for the target of $27 and the SEP contract may not be directly related.

07/07/17 ‐ 2:02pm ET July 7, 2017 at 2:02pm ET

Will
Thank you for that explanation. I’m still learning.

Linda McDonough

07/07/17 ‐ 1:50pm ET July 7, 2017 at 1:50pm ET

Hi John,
Thanks for the question and Will, thank you for the terrific help explaining things. Will is correct, there are many variables when deciding which options to buy. Certainly, one could buy an option with a strike price closer to my target but the stock would need to reach that level before the options expire to increase dramatically. The options trades included with long stock recommendations are always shorter in time horizon than the basic stock trade.
This options trade is betting that STS will be above $17.50 by September 15, 2017 (the expiration date). Please let me know if you have any other questions.
Best,
Linda

Rick

07/10/17 ‐ 2:21pm ET July 10, 2017 at 2:21pm ET

Been waiting for the Sep $17.50 calls to drop closer to $1.00 and I finally caved and paid $1.40.

Mark F

07/11/17 ‐ 11:29am ET July 11, 2017 at 11:29am ET

STS filled @ recommended $1.00

Paul Dash

07/30/17 ‐ 7:11pm ET July 30, 2017 at 7:11pm ET

Hi Linda,

I bought into STS after reading the above, but it has promptly dived around 15% since. Anything going on there?

07/31/17 ‐ 9:41am ET July 31, 2017 at 9:41am ET

Hi Paul,
Just this morning STS reported its second quarter. No news before that. The quarter was a bit sloppy but it looks due to a delay in the delivery of some of its more profitable trucks. I’ll post a more complete review soon but I’m sticking with the stock.
Best,
Linda

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