Is This Company A Gamble Ahead of Earnings? By Brian Nichols - July 22, 2013| Tickers: ABFS, JBHT, YRCW| 0 Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited. There is no company that has more to lose, or gain, than YRC Worldwide(NASDAQ: YRCW) this earnings season. The company will report earnings on July 29, and investors are placing their bets on what could be a very volatile session. Why The Excitement? YRC Worldwide has exploded with gains of 330% in the last three months. The company’s gains were created after they posted an operating income for the first time in six years. For their last quarter, operating income was $9.9 million, compared to ($48.8 million) in the year prior, a difference of $58.7 million. This improvement on lower revenue demonstrates the execution of aggressive cost-cutting measures. However, Q1 results were actually comparable to what we had seen in previous quarters. In Q4 of 2012 operating income increased $68.1 million year-over-year; in Q3 of 2012 it increased $53.4 million. YRC Worldwide’s chief problem is that they still have large interest payments on debt outstanding, meaning that net income is still in the red. This company has diluted shares, accumulated debt, and cut costs to the max over the last few years, yet many are betting on their turnaround. Whether or not YRC Worldwide’s three month rally is a result of perception or fundamental improvements is up to the eye of the beholder. However, the market as a whole seems to like what it sees. Looking ahead, YRC Worldwide does have macro improvements in its favor, and such improvements could be enough to continue its bullish trend. For example, data that measures the tonnage of freight that is transported by motor carriers has significantly jumped. In April, this trucking tonnage index jumped 4.3% year-over-year; in May it rose 6.7%. The fact that trucks are carrying larger loads could bode well for companies such as YRC Worldwide this earnings season. How Does YRC Measure? YRC Worldwide’s market cap of $255 million does not justify the size of the company. YRC Worldwide has annual revenue in excess of $4.8 billion, giving it an industry-best price/sales ratio of 0.06. YRC Worldwide’s most notable competitors are Arkansas Best(NASDAQ: ABFS) and JB Hunt Transport (NASDAQ: JBHT). These are known as asset-based trucking companies, meaning they own their own trucks. Arkansas Best has traded higher by 135% in 2013, partially because of merger rumors with YRC Worldwide. However, the proposal was refused by Arkansas Best. While Arkansas Best and YRC Worldwide would have good synergies, Arkansas Best’s market cap is about twice that of YRC Worldwide, though Arkansas Best has half as much revenue. Arkansas Best is a growth company – with double digit top-line growth – but is still unprofitable, with operating margins of negative 0.7%. Arkansas Best trades at 0.28 times sales, which is still cheap. The reason Arkansas Best is cheap is due to its costs, as the company pays large pension expenses and has a high fixed-cost structure due to it being unionized. Nonetheless, Arkansas Best still has better, more bullish metrics than YRC. JB Hunt is the ideal company in the asset-based space, and reflects the gold standard for operational efficiency. JB Hunt has operating margins of 10%, which is remarkable in this space. The company, with revenue of $5.2 billion, is not much larger than YRC, but its operating efficiency has earned it a higher premium at 1.72 times sales. Final Thoughts YRC has been awarded the lowest valuation of its competitors because it has the most significant operational flaws. Sure, the company has made vast improvements over the last year, but there are still many questions as to whether or not they can produce income after payments on debt outstanding. This upcoming quarter will tell us a lot. It will tell us the direction that YRC is moving, and if last quarter’s operating profit was a fluke. The company has positive momentum in its favor, and has tremendous upside potential compared to its industry. Therefore, I do think it is a stock worth watching, but for safety reasons, I’d view it with caution ahead of its earnings report. http://beta.fool.com/briannichols/2013/07/22/is-this-company-a-gamble-ahead-of-earnings/41024/?source=eogyholnk0000001
|