Archive: YRC Worldwide (YRCW)

YRC: Amendment to YRC Credit Agreements, One of Many Reasons I Prefer Landstar

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).

Topics: Landstar Systems (LSTR), Trucking, YRC Worldwide (YRCW) | No Comments

UPS: Long UPS, Short FDX Paired Trade May Work


Creative Commons License 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.)

fdx-ups-accruals.jpg

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.

Topics: Air Courier, CH Robinson Worldwide (CHRW), FedEx (FDX), Landstar Systems (LSTR), Transportation, Trucking, United Parcel Service (UPS), YRC Worldwide (YRCW) | No Comments

YRCW: YRC Worldwide Proves Skeptical Investors Right

In December I wrote:

Nobody believes trucking company YRC Worldwide (YRCW) will earn the consensus estimate of $2.52 per share in 2008. If they did, the stock would be trading significantly higher than $17.50 per share.

After all, the company earned $5.00 per share in 2006 and is expected to pull in $2.40 this year.

Well, the $2.40 in 2007 turned out to be $1.88 – and that is only if you ignore $12.77 per share of impairment charges. Although the charges did not affect cash flows in 2007, they indicate that earnings in years gone by were higher than should have been reported in retrospect.

Since the article, the shares are down nearly 16%, compared with an 11% decline in the S&P 500. At one point the shares traded below $12 per share. Meanwhile, my favored trucking play, Landstar (LSTR - Annual Report) is up more than 5%. I still think Landstar offers a more compelling valuation and lower risk over the full economic cycle.

Disclosure: William A. Trent owns shares of Landstar (LSTR - Annual Report) at the time of publication.

Topics: Landstar Systems (LSTR), Trucking, YRC Worldwide (YRCW) | No Comments

YRCW: How Bad Can Things Get For YRC Worldwide?

The following is my RealMoney column from December 6, 2006.

YRCW shares are pricing in a much lower EPS outlook than the consensus. Does that signal a buying opportunity?

Nobody believes trucking company YRC Worldwide (YRCW) will earn the consensus estimate of $2.52 per share in 2008. If they did, the stock would be trading significantly higher than $17.50 per share.

After all, the company earned $5.00 per share in 2006 and is expected to pull in $2.40 this year. If this year is really “the bottom” for earnings investors should be willing to pay at least $30, which equates to the company’s 5-year average P/E of 12x.

So investors clearly think YRC will earn less – probably much less – than $2.52. The questions then become:

  1. How much less will they earn?
  2. Does the current price reflect the worst case scenario?
  3. If nobody believes YRC will earn $2.52 how did it become the consensus estimate?

I’ll leave the last question to philosophers, but I think I can take a stab at the first two.

How Low Can They Go?

To get a feel for the potential earnings bottom, I looked at the history available from Zacks Research Wizard.

yrcweps.jpg

Source: Zacks Research Wizard

Clearly the earnings per share can be much lower than $2.52. In fact, the last economic slowdown included one year that wiped out the peak year, the subsequent down year and a good part of the next year’s recovery. Furthermore, the late 1990’s also indicate that several down years can wipe out a good deal of the positive earnings in up years. All of which goes to show why I prefer the non-asset based transportation companies like Landstar (LSTR - Annual Report) and CH Robinson (CHRW - Annual Report).

So one approach to valuation would be to take a page from Ben Graham’s Intelligent Investor (page 313 in my edition) and use a longer-term average of earnings per share. I chose five years, giving me the following chart.

Sources: Zacks Research Wizard, William A. Trent

Right away, I see two useful take-aways from this chart. One is that the trough-peak pattern from 1999-2001 looks very similar to the one in 2004-2005. This gives me some confidence that this cyclical relationship may represent the next cycle as well. The other is that the cumulative peak-peak growth rate from 2001-2006 is about 25%.

Applying 25% growth from the 2004 trough gives me a target for the average EPS in the next trough – about $0.44. This helps me answer the first question (as well as some indication of how severe the negative earnings year(s) will have to be in order to push the 5-year average that low.)

Is the worst case priced in?

An old rule of thumb is to buy cyclical stocks when the P/E is high and sell when it is low. This is because the P/E is high when earnings are at their lowest and about to recover. Just looking at the estimates, though, the current P/E is low.

But we already established that the estimates aren’t believed. If the five-year average earnings per share is about to drop to $0.44, the stock is currently trading at about 40x trough earnings. That is starting to sound like the “high P/E” that would signal a buy.

yrcchart.gif

And whaddya know? It looks from this chart that as YRC started to pull out of the last earnings trough it was getting a multiple of about 40x earnings. Furthermore, the stock is now trading below its levels five years ago even though the general EPS trend has been up.

This doesn’t, of course, imply that the worst is priced in. Nobody can really know that for sure. But it sure looks like we’re getting close.

Cash Flow Talks

Of course, I always prefer to look at companies on a cash flow basis rather than an earnings basis. Free cash flow (cash from operations less capital expenditures) has been negative for the last three quarters. Over the trailing 12 months it comes to $68 million – a 3% yield on the $2.3 billion enterprise value.

Ideally, in exchange for accepting the risk related to a stock like YRCW I would to get a higher return than I would from other investments like a 3.3% 5-year Treasury bond. Although the current free cash flow yield for YRC is less than the Treasury yield, if the risk is mostly reflected then proximity to the risk-free rate isn’t necessarily bad.

Once again turning to a full-cycle perspective, the five-year average free cash flow for YRC 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 is yielding even more and has less risk (in my opinion) over the full cycle it isn’t enough to make me switch.

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

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

Topics: CH Robinson Worldwide (CHRW), Landstar Systems (LSTR), Miscellaneous Transportation, Trucking, YRC Worldwide (YRCW) | 2 Comments

YRCW: Time to Own Green Eggs and Yellow Trucks?

Last October I said “I would not own Green Eggs or Yellow Trucks.”

As the economy slows, those companies like CH Robinson (CHRWAnnual Report) and Landstar (LSTRAnnual Report) that get their capacity from independent contractors on an as-needed basis have lower overhead expenses and remain profitable. If the economy slows much further, Yellow’s guidance reductions will be even larger.

My lack of appetite was well founded, as trucker YRC Worldwide (YRCW) – the trucker formerly known as Yellow – is down 22% since then while CH Robinson and Landstar are flat or up. As to the economy, the ATA trucking index says it all:

The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index decreased 0.1 percent in June, marking the third consecutive month-to-month drop. Tonnage fell 1.3 percent in May and has dropped 3.5 percent since March. The not seasonally adjusted index dropped 3.3 percent from May to 114.1.

On a seasonally adjusted basis, the tonnage index declined to a seven-month low of 110.5 (2000 = 100) in June from 110.6 the previous month. Compared with a year earlier, tonnage was down 3.4 percent in June, which is just a slight improvement from the 3.6 percent year-over-year decrease in May.

Meanwhile, Yellow’s guidance reductions have indeed been large. From initial expectations of $5.65-$5.85 for 2006 the company ended up earning just $5.00. What had once been expected to be an up year in 2007 is now forecast at just $3.17 and estimates have been steadily dropping for the last 90 days. It is probably safe to say that few investors believe the $3.81 forecast for 2008.

But still, even with the current depressed earnings there are earnings. Further, it looks like it would take a significant further decline for the company to end up with a loss. The trailing twelve month EV/EBITDA is a mere 4.35x. Given that the cycle peak earnings should still someday be in the $6.00 range the stock is starting to look like a bargain.

I’m not the only one who thinks so, either. According to StockPickr, the January 35 calls have seen unusually high trading volume lately. I’m thinking those traders may be on to something.

Topics: CH Robinson Worldwide (CHRW), Landstar Systems (LSTR), Miscellaneous Transportation, Trucking, YRC Worldwide (YRCW) | No Comments

YRCW: Quick Take on YRC Worldwide Earnings

Large Cap Watch List (Track at Marketocracy) member YRC Worldwide Inc. (YRCW) today announced reported diluted earnings per share (”EPS”) for the second quarter 2007 of $0.95 compared to $1.58 in the second quarter last year. Adjusted diluted EPS was $0.91, compared to $1.62 for the second quarter 2006.

Although the results looked awful, the signs of a poor environment for transportation had been building. The shares actually rallied in after-hours trading, suggesting that investors may have feared worse or even think that the bottom has been reached. I doubt that latter point, but of course I’ve been wrong before.

YRC management, however seems to agree with me on this one. They offered guidance for a litany of line items  ranging from interest expense to tax rate to shares outstanding. As far as revenue and earnings, however, your guess is apparently as good as theirs. At least whatever number you come up with, you’ll have a decent idea how much interest to expense, how much tax to reduce it by and how many shares to divide it by to arrive at EPS.

The company managed to increase its cash flow from operating activities slightly, but also managed to spend more than it generated buying new trucks.  Which is one more reason to prefer Landstar (LSTR - Annual Report) and CH Robinson (CHRW - Annual Report).

Topics: CH Robinson Worldwide (CHRW), Landstar Systems (LSTR), Miscellaneous Transportation, Transportation, Trucking, YRC Worldwide (YRCW) | No Comments

YRCW: YRC Worldwide Shows Why We’re Staying Away From Truckers Who Own Trucks

YRC Worldwide (YRCW) Announced First Quarter Earnings:

YRC Worldwide reported the following consolidated results for the first quarter 2007:– Quarterly operating revenue of $2.3 billion compared to first quarter last year of $2.4 billion.
– Adjusted operating income of $38 million compared to first quarter 2006 adjusted operating income of $89 million. Adjustments in 2007 included reorganization charges and losses on property disposals. Reported operating income was $20 million compared to reported operating income of $88 million in 2006.
– Net cash from operating activities was $123 million for the quarter.

Adjusted earnigns per share of $0.20 were well below the consensus estimate of $0.40 on revenue of $2.28 billion. This is why in our earnings preview we said “We’re staying away from truckers who own trucks.”

“Our results were impacted by a weaker economy and extremely difficult operating conditions during the first quarter,” stated Bill Zollars, Chairman, President and CEO of YRC Worldwide.

The weakness in trucking has been well documented. The company thinks it will continue:

“The economy grew more slowly than anticipated in the first quarter,” Zollars stated, “and the general consensus of economists appears to be pushing out an improving economy by one quarter which will continue to impact us as we move through 2007.”

Based on the first quarter results and the revised economic outlook, the company is updating full-year guidance.

– Full year 2007 adjusted, diluted EPS between $4.00 and $4.20.
– Full year 2007 consolidated revenue of $10.2 billion, interest expense around $90 million and a consolidated income tax rate of 39.0%.
– Diluted average shares of around 59 million assuming an average year-to-date, through March 31, 2007, stock price of $42 per share.
– 2007 gross capital expenditures in the range of $375 to $400 million.

The consensus was previously estimating $4.39 per share this year on revenue of $9.87 billion, in line with the previous guidance reductions.

Topics: Stock Market, YRC Worldwide (YRCW) | 1 Comment

The Week Ahead (22 April 2007)

The Economic Calendar is relatively light this week. Potential market movers include:

  • Wednesday’s Durable Goods report (consensus 2.2%)
  • Friday’s advance report on Q1 GDP (consensus 1.8%)

Earnings are another story. We are in the peak part of earnings season this week. A few of the stocks we follow:

Monday

  • Altera (ALTR) – valuation is rich but looks set up to beat on earnings.
  • Texas Instruments (TXN - Annual Report) – March and June quarters have both had significant downward revisions. Will day of reckoning be forestalled?

Tuesday

  • AU Optronics (AUO) – Forecasting losses, but panel business may have bottomed out.
  • CDW Corporation (CDWC) – 14.6% sales growth doable given Berbee acquisition.
  • CH Robinson (CHRW - Annual Report) – Could beat.
  • CSG Systems (CSGS) – earnings should be a piece of cake. If private equity buyers don’t take them out they’ll do it themselves the slow way.
  • Lexmark (LXK) – Estimates are doable but we’re always waiting for this company to trip up.
  • ST Microelectronics (STM) – Doing the right thing. Hopefully will pay off.
  • AT&T (T - Annual Report) – Estimates and stock both keep rising.

Wednesday

  • Apple (AAPL) – Hunch: company will blow away earnings, issue horrible guidance and blame it on iPhone build.
  • Arkansas Best (ABFS) – We’re staying away from truckers who own trucks.
  • Corning (GLW - Annual Report) – current quarter ok, guidance at risk.
  • LSI Logic (LSI) – May blame their poor guidance on Agere.
  • Maxim (MXIM) – Company is out of gas but focus will be on whether they might sell out.
  • Qualcomm (QCOM) – Nokia Nokia Blah Blah Nokia ad nauseam (excerpt from pending conference call transcript)
  • Silicon Laboratories SLABSold wireless just when biggest customer began to recover. What other surprises may be in store?
  • UPS (UPS) – They shouldn’t have trouble beating the estimates (but that doesn’t mean they won’t).
  • Xilinx (XLNX) – Altera with more risk to the earnings target.

Thursday

Friday

  • Dassault Systemes (DASTY) – We like Ansys (ANSS) better but don’t see why this name wouldn’t beat.
  • Ceradyne (CRDN)  – Earnings could be anywhere and don’t really matter.

Enjoy!

Disclosure: William Trent has a long position in SMH.

Topics: ANSYS (ANSS), AT&T (T), AU Optronics (AUO), Altera (ALTR), Apple (AAPL), Arkansas Best (ABFS), CDW Corp (CDWC), CH Robinson Worldwide (CHRW), CSG Systems (CSGS), Ceradyne (CRDN), Corning (GLW), Curtiss Wright (CW), Dassault Systemes (DASTY), KLA-Tencor (KLAC), LSI Corp. (LSI), Lexmark (LXK), MEMC Electronic Materials (WFR), Maxim Integrated Products (MXIM), McAfee (MFE), Microsoft (MSFT), Qualcomm (QCOM), STMicroelectronics (STM), Sandisk (SNDK), Silicon Laboratories (SLAB), Stock Market, Texas Instruments (TXN), United Parcel Service (UPS), Watch List, Xilinx (XLNX), YRC Worldwide (YRCW) | 4 Comments

Truck Shipments Continue to Confirm Consumer Slowdown

Recent data from the Chicago Fed to home prices to retail sales and jobs data have all pointed to the long-awaited slowdown in consumer spending. The latest sign comes courtesy of the people who move the goods from manufacturer to retailer and, ultimately, consumer.
Trucking Shipments Drop by 1.7 Percent: Financial News – Yahoo! Finance

U.S. trucking shipments declined by 1.7 percent in February compared with a year earlier, an industry trade group said.The American Trucking Associations, in a monthly report released Monday, said shipments have declined on a year-over-year basis for eight straight months. Its truck tonnage index rose 1.6 percent from January, however.

Because more than two-thirds of all manufactured and retail goods in the U.S. are carried by truck, the industry is considered an important economic bellwether.

And, since two thirds of the economy is consumer-related, the trucking business also offers a window into consumer spending habits.

The slowdown in trucking could easily have been anticipated, given the data points mentioned above, along with the earnings warning from FedEx (FDX - Annual Report) and weaker pricing for corrugated boxes.  One reason to watch so many different indicators is to be able to spot when a given data point should be given extra attention or ignored based on whether it supports everything else that is known.

Topics: Arkansas Best (ABFS), Economy, Landstar Systems (LSTR), Stock Market, Transportation, YRC Worldwide (YRCW) | 4 Comments

CHRW: C.H. Robinson Keeps on Trucking

We have written many times about why we believe the transportation companies that act more as brokers will perform better than their asset-owning peers.  And yesterday, the juxtaposition between the UPS disappointment and the C.H. Robinson blowout offered a case in point. According to CH Robinson:

Total Transportation gross profits increased 19.5 percent to $246.2 million in the fourth quarter of 2006 from $205.9 million in the fourth quarter of 2005. Our Transportation gross profit margin increased to 18.3 percent in 2006 from 15.7 percent in 2005.

Pretty spectacular given the cautious guidance and reports from both asset-based truckers and non-asset-based peer Landstar (LSTR - Annual Report).

Disclosure: At time of publication, author is short Landstar (LSTR - Annual Report) put options.

Topics: CH Robinson Worldwide (CHRW), Landstar Systems (LSTR), Stock Market, United Parcel Service (UPS), YRC Worldwide (YRCW) | 1 Comment