That’s why sector shares are now at multi-year lows, and potential bankruptcies for the weakest hands remain an open question. Just this morning, shares of YRC Worldwide (YRCW) which operates all those trucks with the word “Yellow” on the side, had a nice gain thanks to improving operating conditions. But YRC may still be forced into the hands of creditors if it can’t borrow more funds to buy time to turn results around.
Ironically, the whole industry may be poised for an upturn, and the competitors would really benefit if YRC needs to materially shrink its current size. When it released March quarter results, Arkansas Best (ABFS) noted that the volume of freight it carried rose +2% in January from a year earlier. By March, freight volumes were rising at a +7% annual clip, and according to recent reports, they trended above +10% in April and May. The industry is still under-utilized so truckers have not been able to raise rates back to pre-recession levels, but that may happen as we head into 2011.
You can see the potential opportunities for the healthier firms if they can post stronger volumes and eventually better pricing. For every +1% improvement in pricing, Arkansas Best earns another $0.40 a share. Each +1% increase in volume adds about $0.04 in earnings per share. By that logic, Arkansas Best is expected to claw back to break-even in the September quarter, and pound out steadily improving quarters from there.
Rival Conway also stands to benefit in such a scenario. The carrier never suffered losses in this downturn, and per-share profits are expected to double both this year and next, to around $2 a share in 2011. Back when the economy was growing at a steady clip, Con-way earned $4 to $5 a share. Here again, YRC’s losses would be Con-way’s gain, implying potentially record results in the next cycle.
It should be noted that Con-way is slightly different from its rivals as it derives about one-third of sales from shipping logistics services, which held up well during the downturn; however, the company lacks similar economic upside as it is not as sensitive to freight pricing and volumes.
Action to Take --> Even though YRC remains in distress, it did mention this morning that demand and pricing trends are improving, echoing recent comments from Arkansas Best and Con-way. Investors remain cool to all three stocks, even though the latter two look set to rebound. Shares are very cheap based on mid-cycle profits.
-- David Sterman