It was all fun and games when WallStrip and AlphaTrends jumped on the Landstar bandwagon. Now that the company is profiled in BusinessWeek I’m getting a little worried.

Landstar: Trucking Ahead

We think Landstar System (LSTR; recent price, 53), a non-asset-based transportation company, has an extremely flexible strategy that limits its exposure to economic downturns while allowing it to rapidly ramp up operations when the economy improves. We think this model reduces balance sheet risk by limiting necessary investments in physical assets such as trucks and other equipment, but also allows the company to rapidly scale up operations during periods of economic strength and strong transportation demand.

In our view, the company is well positioned to benefit from any strengthening in the U.S. economy in the latter half of the year. Even if the U.S. economy does not start to strengthen, we expect Landstar to increase revenues and earnings on market share gains, additional penetration into existing customer accounts, and growth of a new revenue stream from its recently started warehousing business.

We believe Landstar stock is likely to show an expansion in its price-earnings (p-e) ratio on improvement in the U.S. economy. Also, we think Landstar should be able to close the discount it trades at compared to peers as it expands its use of brokers, and increases its penetration into the intermodal business.

The stock carries Standard & Poor’s highest investment recommendation of 5 STARS (strong buy).

There is nothing wrong with the analysis, and don’t get me wrong - I still like the long-term prospects for Landstar and am willing to own it up to a Treasury-par free cash flow yield. Its just that all the attention may signal a short term top.

Disclosure: At time of publication, William Trent has a covered call position in shares of Landstar (LSTR - Annual Report).

A while back I complained that several stocks I had been bearish about had gotten boosts from takeout offers. Namely, Diebold (DBD), Delta Airlines (DAL) and Yahoo! (YHOO).

Delta stock finally broke down, and then agreed to a merger at much lower share prices.

Today I look less stupid about Yahoo, though the stock is still up 5% from the date of my bearish article, compared to a 4.3% decline in the S&P 500.

So that’s two down and one to go.  Each reduction in my apparent stupidity is welcome.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

Landstar (LSTR - Annual Report) has long been one of my favorite stocks. I have said before that I would be willing to own Landstar up to a parity yield with Treasuries, because I think the growth alone is sufficient premium for the risk. Based on the 2007 cash flows and the current yield on 5-year Treasuries, that implies a potential price of $84 - so its safe to say I don’t expect to sell any time soon.

If you want a quick understanding of what Landstar does, it was the featured stock in today’s Wallstrip.  As such, Brian Shannon chimed in with his review, saying “there is nothing wrong with this stock technically.”

Disclosure: At time of publication, William Trent has a covered call position in shares of Landstar (LSTR - Annual Report).

In December, I said from a “full-cycle perspective, the five-year average free cash flow for YRC Worldwide (YRCW) is $152 million, and the current yield based on that figure is 6.6% - twice the Treasury yield.

Twice the Treasury yield would normally justify the investment, particularly for investors who are either more optimistic or more risk-tolerant than I am. But given that Landstar (LSTR - Annual Report) is yielding even more and has less risk (in my opinion) over the full cycle it isn’t enough to make me switch.”

Since that time, YRC has declined 25.5%, while Landstar is up 34.6% since I said I expected it to shine again.

As to the question of relative risk, Landstar is virtually debt free, while YRC has loads of debt and recently received a downgrade. As a result, it renegotiated its credit agreement. Until the company’s credit rating is restored to BBB- or better, the Credit Agreement Amendment:

• increases, the Company’s allowable Total Leverage Ratio (as defined in the Credit Facility) from 3.0x to (i) 3.75x for each of the fiscal quarters ended March 31, June 30 and September 30, 2008 and (ii) 3.5x for each fiscal quarter thereafter;

• increases the interest rates and fees applicable to the revolving credit facility; the Company expects interest expense to increase $1.5 – 4.0 million annually with this amendment;

• requires the Company and its domestic subsidiaries to pledge additional collateral;

• requires the Company and its subsidiaries to pledge additional assets, including rolling stock and the remaining real estate if the Total Leverage Ratio exceeds 3.5x at the end of any Test Period (as defined in the Credit Facility) or if the Company receives a rating of BB- or worse from Standard & Poor’s and Ba3 or worse;

• requires each domestic subsidiary of the Company except for YRRFC (as defined below) to guarantee the credit facility; and

• modifies certain negative covenants (and in certain instances introduces new negative covenants) related to permitted liens, permitted acquisitions, permitted asset sales (and certain related mandatory prepayments from the proceeds thereof) and restricted payments.

I fully expect YRC to survive, and at some point it will make for a good trade, as the leverage works in the other direction. In the meantime, I’m glad I am positioned the way I am.

Disclosure: At time of publication, William Trent is long Landstar (LSTR - Annual Report).

Landstar System, Inc. (LSTR - Annual Report) reported revenue in the 2008 first quarter increased approximately 6 percent to $609 million compared to $577 million for the 2007 first quarter. Net income for the thirteen-week period ended March 29, 2008 was $23.7 million, or $0.45 per diluted share, compared to net income of $21.6 million, or $0.38 per diluted share, for the thirteen-week period ended March 31, 2007.

The midpoint of the $0.51 to $0.57 guidance range for the second quarter was ahead of the $0.53 consensus.

I have said before that I would be willing to own Landstar up to a parity yield with Treasuries, because I think the growth alone is sufficient premium for the risk. Based on the 2007 cash flows and the current yield on 5-year Treasuries, that implies a potential price of $84 - so its safe to say I don’t expect to sell any time soon.

Disclosure: At time of publication, William Trent owns shares of Landstar

My latest column is up at RealMoney.

I dissect the jobs report to see which industries are showing the best/worst growth in new hiring, on the thesis that companies in these industries may present investment opportunities.

The fastest growing industries are restaurants, hospitals, mine services, machinery, and oil & gas extraction. The worst were transportation equipment and a plethora of housing-related sectors.

Disclosure: At time of publication, William Trent owns shares of Starbucks (SBUX).

Disclosure: Author is long Starbucks (SBUX) at time of publication.

My latest column is up at RealMoney. Here is a summary:

Government economic reports can do more than just indicate the state of the economy. Since many of the reports include industry-level data, digging deeper in the reports can help investors find specific industries to consider more closely. For example, the Bureau of Labor Statistics, which prepares the PPI report, provides detailed information on an industry basis.

Since I wrote about the PPI data in September, the pricing power has shifted to some different industries. Therefore, I thought an update would be in order.

Some of the industries that look interesting are petroleum refineries, industrial gases, computers, computer storage devices, and line-haul railroads.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned.

Last September I was bearish on Delta Airlines (DAL), saying “How quickly we get from something that looks enticing to something that looks like it came out of bankruptcy five months ago. Which, of course, it did. Bottom line, if you want to take a flier on an airline, I’d stick with one of the short squeeze plays. The majors still look like they can cause a major league stomachache.”

Earlier this month, I noted that I should learn to take the money and run, as three of my previously correct bearish calls had been bolstered by takeover rumors.  With Delta now solidly back in the column of not making me look stupid, it’s time to call it quits on this call.

U.S airlines plunge on recession worries | Markets | Markets News | Reuters

Shares in U.S. airlines plunged on Wednesday, with Northwest Airlines (NWA) and Alaska Air Group (ALK) dropping more than 10 percent, after JP Morgan cut its ratings on those carriers and several others due to recession concerns.

Since my original bearish article, Delta is now down 37.3%, compared to a 10.3% decline in the S&P 500 (SPY) over the same period. Although I didn’t take a financial position in the stock, I am figuratively closing the position. Before another greater fool comes along and tries to buy them out, I’m taking the money and running.

Disclosure: At the time of publication, William Trent has no financial position in the companies mentioned. 

photo credit: atennies94

The following article is a reprint of my February 27, 2008 RealMoney column.

A long UPS/short FDX paired trade could work, but I’d wait for a pullback to $65 before UPS would tempt me as a long-only play.

My bullish November 2007 Landstar (LSTR - Annual Report) column represents my most successful pick for RealMoney to date. The stock is up 20%, compared to a 6% decline in the S&P 500. Landstar has also outperformed CH Robinson (CHRW - Annual Report) by 9% since I predicted as much in December, and YRC Worldwide (YRCW) has underperformed the S&P by 10% since I advised looking elsewhere.

Given that my transportation picks seem to be working out better than my others, I decided to push my luck with another long-short idea. This time, I think United Parcel Service (UPS) can continue its recent outperformance relative to FedEx (FDX - Annual Report).

Two years ago, I wrote briefly about the relationship on my blog, saying:

FDX has greater operating leverage and will continue to outperform as long as the economy continues to expand and trucking capacity remains tight…. Timing this switch is the difficult part.

Over those two years, the timing has clearly happened. UPS has outperformed FedEx by about 10% since then, and by 25% in the last 12 months.

Other than the operating leverage, I think the stocks are similar enough that a long-short trade would truly offset much of the risks. Clearly the macroeconomic and industry exposures are similar.

FedEx is expected to grow slightly faster (15% compared to 13% for UPS) over the next five years and has a lower P/E multiple. But UPS generates far more free cash flow. The free cash flow yield at UPS is 5.3%, compared to just 2% at FedEx. The cash flows can be used to buy back shares, pay dividends, or make acquisitions. All of these could boost the EPS growth rate for UPS. Because of the higher yield, I think there is much less downside for UPS.

UPS also tends to have slightly higher earnings quality, on average, than FedEx. I use the accrual ratio, which measures the difference between cash earnings and accounting earnings, as a proxy for earnings quality. This ratio is less volatile for UPS and tends to be closer to zero in most periods, both of which give me more confidence in the earnings reported by UPS (though earnings quality at FedEx is by no means poor.)

Source: Zacks Research Wizard, compiled by William Trent

The differences in performance, however, are only relative. Long-only investors have been disappointed by UPS over time, with the shares trading within 10% of the current price for the last two years, and within 20% for the last five. In fact, UPS is almost exactly in the middle of its long-term trading range.

I think the future performance will remain uninspiring. The 5.3% free cash flow yield is reasonable and offers some downside protection, but is not enough to juice returns. At roughly five times book value and 16 times earnings, I don’t see a huge opportunity for expanding valuation. The tight trading range has also means there is little advantage to a put-write strategy. Low stock volatility means the March $70 puts offer just over a 1% premium. That isn’t enough for taking the risk that the stock falls to the low end of its trading range – though I’d be much more favorably disposed toward UPS if the stock pulled back to $65 or so.

For the reasons outlined above, I think a paired trade going long UPS and short FedEx could continue to work over the next few months.

Disclosures: William Trent is long Landstar (LSTR - Annual Report)

Zacks Investment Research has provided Stock Market Beat with a complimentary trial subscription to Research Wizard.

I should probably learn to take the money and run more quickly. Back in December I wrote about Diebold (DBD) at about $33 per share and said investors should probably look elsewhere due to earnings quality concerns and what I considered to be unsustainable cash flows. That looked good until this morning, when the takeover offer from United Technologies (UTX) sent the shares up from $25 to $39.

In the interest of full disclosure, this is the third time in as many months that a takeover bid has made one of my bearish calls look stupid (at least temporarily.) In September I wrote bearish pieces on both Yahoo (YHOO) and Delta Airlines (DAL) at prices of $23.30 and $17.65, respectively. I no longer look stupid on Delta since their deal appears to have run aground.

Interestingly, of the three Delta was the only one whose management actually wanted the deal. We’ll have to see whether the Yahoo and Diebold hostile bids suffer the same fate.

Position: No financial positions in the stocks mentioned