As a brief addendum to my initial article "YRC Worldwide: A Compelling Short Idea" I wanted to highlight a few points that I believe merit investor interest. I have not quantified my findings due to time constraints but would urge investors interested in this post to do their own diligence around the points that I bring up. When I initially put out the short sell call on YRC Worldwide (YRCW) earlier this year, it was trading at $13.84. Now at $3.53, I have decided to put out a Buy call on the name. Here is what has changed:
- The company is going to get a concession from the teamsters amounting to approximately a $200 million wage reduction (the company is calling for $220 - $250 million) and the suspension of a cost of living adjustment. I am confident of this passing because if the Teamsters do not ratify the contract, the company has a good likelihood of going under especially if the current freight environment were to persist.
- The benefit to the bottom line of a $200 million wage reduction is calculated as follows:
- Wage reduction: $200 million
- Tax rate assumed: 38%
- After tax benefit: $124 million
- Shares outstanding as of Q3 2008: 59.3 million
- As per new labor contract assuming ratified: 15% primary shares to be provided to Teamster employees in the form of warrants.Assume warrants to be struck at current price.
- Total Adjusted Shares Outstanding (including warrants): 68.2 million
- EPS benefit from new labor contract: $124 million / 68.2 million = $1.82
- Debt covenant breach has been taken out of the equation. The company is getting the benefit on gain of early extinguishment of debt as an add-back to EBITDA which, when coupled with the curtailment of benefit plan gain, will provide ample cushion on a LTM EBITIDA basis.
- Cost savings from merging of Roadway and Yellow to improve profitability. Management is calling for run-rate operating profit improvement in excess of $200 million by 2009.
- Continued short interest in the company at approximately 31% of the float can pave the way for a big squeeze.
Now obviously the freight environment is going to deteriorate further, and during the merger of Roadway and Yellow, we are going to see the company lose freight to its competitors. However, one should keep in mind that analysts are not factoring in the labor savings into their models yet as the ratification of the contract has yet to occur. Once it does occur, estimates that have been trending lower for the company will be ratcheted upwards.
I hate to say this but the ugly freight environment has turned out to be a blessing for the company as it is in a position to negotiate a better labor contract and the Teamsters do not have much ability to push back as bankruptcy is not an option for them. I, however, do like the fact that the Teamsters will be given equity in the company, as I believe that necessary steps are finally being taken to put the "house in order" and the share price will reflect that over the next several months.
I would personally like to see Bill Zollars out and would urge the Board to push for his ouster. This single act will create significant shareholder value both near term as well as longer term and the financial markets will respond most favorably to this news. It is clearly evident that Zollars has been responsible for the current situation of the company. With the recent goodwill writedown that the company took, Zollars has cemented the view that the acquisition of USF was a complete and total disaster!
Anyhow, the freight environment continues to deteriorate but YRC with the co-operation of its banking consortium is taking the right steps to put the "truck on the road to recovery." I think it is the right time to start building a position ahead of the Teamster vote, as I believe that the contract shall be ratified which will take a liquidity crisis of the table for the foreseeable future.
Stock position: None.