YRC Worldwide: Time to Go Long

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:

1. 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.
2. 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
3. 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.
4. 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.
5. 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.

Comments

[Larry House:]

The "road to recovery" may be a long one. It is too soon to buy the hope.

2008 Dec 23 11:05 AM

[Buzzard Bowler:]

I hope this dude is right. I have 24 yrs. with Yellow, and at age 44, I am WAAAAY too young to think of retiring just yet. My initial hopes were to stay and make 30 yrs., but the Central States Pension Fund has changed that for me.
I have too much time invested in this company, and besides that, where else could I go to work driving a truck making this kind of money (even at 10% less), with the benefits I have, and not have to totally bust my butt?
I see these guys delivering to restaurants and fast food joints, running up and down some ramp into their trailer, in all types of weather, and I stop and think...."Gee, I don't really have it THAT bad, do I?"

2008 Dec 23 11:37 AM

[SuperYellow...:]

Continuing to invest in an organization that puts customers and employees FIRST, is always a good thing. I have confidence that this company is moving forward in such a positive force, that the competition best be on their toes.

2008 Dec 23 01:43 PM

[XRDWY:]

Although prayer is not a strategy, as a Roadway retiree and stockholder I pray you are right... Zollers must go, but unfortunately I don't see that happening unless he gets his dream job at CNBC.

2008 Dec 23 04:41 PM

[ol smokey:]

If the deal with ABF purchase of USF Holland is finalized this will be a much needed cash for YRC to have for the near future.

2008 Dec 24 11:08 AM

[RDWY#1:]

I have said from day one of the purchase of US Freightways,3 years ago.Why are we buying a struggling carrier,whose core business is automotive.And for what he has done to Yellow,and Roadway,finances?This economy separates the men,from the boys,as far as CEO'S.Time to pay Zollars his 2.6 million,and don,t let the door hit you in the @@@!

2008 Dec 24 02:30 PM

[animal70X7:]

Yellowgirl who do you work for? Are they hiring? You are OBVIOUSLY not talking about YRC. They care nothing for their employees and I would be amazed if they cared about their customers any farther than collecting for the freight.

2008 Dec 24 03:46 PM

[Smitty6972:]

I worked for TNT Holland then USF Holland and it was a wonderful company compared to CF and Interstate Motor Freight System that I worked for. Their operating ratio was in the 80s. When they were bought by YRC, this was total disaster for USF. They operate just like the first two companies I worked for and it is no wonder that they are self destructing with the bean couinters they have. When they realize that the blood flow in the companies are the drivers, then they will prosper. Until then, they will sink and fast. Concessions will never work as they will keep on making the same idiotic mistakes. If ABF does buy them, they are a winner and always have been, USF will do fine.

2008 Dec 24 09:06 PM

[XUSF:]

I agree with the poster that touted USF Holland. As a former employee of 12 years, I resigned because of mismanagement of the company. The downhill slide began when Cam Caruth retired US Freightways, and Skinner took over. It became more apparent when Pete Neydon left, and Steve Caddy (who assisted in running CF into the ground) was made President. The biggest concern with YRC is that they operated USF Holland, a short-haul carrier with a long-haul mentality, and now can't understand why that didn't work. The old philosophy had been, "Take care of your customers and your people, and the bottom line will take care of itself." That worked until the "bean counters" came into play. Lanes were cut, freight stacked high and tight caused claims to go up, and good employees have left. My fear is that there are too few people around who remember "how they used to do it.' I hope ABF gets USF. They are still family owned and honestly concerned about the business. We'll see.

2008 Dec 26 10:52 AM

[redhawkflhtcu:]

Zollars has to go, it's that plain and simple he has no idea of how to run freight. The man is more interested in giving talks to groups and getting his name in the paper than running a company. I have 25 years with Roadway and believe that if we were still by ourselves we would be hurting like everyone else but we would survive. You can't take a company(Roadway) that makes a profit even in poor operating times and turn them into what this moron did, a company going down without the ability to fight back or at least put up a fight. Poor management by Yellow and Zollars is taking us all down. I can't believe Yellow has stayed open this long with loosers like Zollars running things. Roadway by itself was a good company and had a plan. And Super Yellow Girl if you think Yellow puts customers and employees first you are indeed just a girl and wet behind the ears or Bill Dollar Zollars secretary.

Jan 01 12:00 AM

[P&D Man:]

YRC will sink if they don't unload USF...their entire operation is awful....as of late, USF is a money drain!.....Zollars had better see the light and dump them quickly....I am even confident that ABF could save them from themselves.

Jan 02 09:12 PM

[chicken hauler:]

apparently p&d man has no mind or thoughts of his own. he believes everything zollars & his cronnies say. before yrc, usf was constantly buying new equiptment, building new terminals, and expanding. usf had one of the lowest claims rates and operating ratios in the buisness. now claims are sky high due to "high and tight",and customers are dropping like flies. operating ratio is up because usf to yrc is what cf was to conway, a cash cow. even equiptment maintance is out of control because of idiotic scheduling and routing to "company shops", sometimes sitting outside for up to a week or more waiting to be brought in and worked on. a complete waste of good equiptment. until changes are made at the top, no amount of consessions by the backbone of this company will help. i suggest in the future before you verbaly tear apart a company,you do a little research and know what you are talking about!

Jan 03 03:02 PM

[ausfpcofpie:]

As a former employee of not only USF Dugan but PIE Nationwide I can tell you that Teamster union wage consessions are not going to do a thing. It is only a tool so that the company executives can pocket and/ or spend more money and so that the union can collect as much union dues as possibe. If I were a union employee I would ask if the Teamsters were going to cut union dues by 10% also ? At PIE ( aka: Olyimpia Holding Company) company CEO Leonard Pelloulo got charged with 42 counts of fraud and racketeering for his actions. His actions brought down not only PIE but Transcon and in part McLeen also. If YRC is to survive then they must have a president with integrity and honesty and executives that will share the "pain" with the common employees. USF had that before it was acquired by YRC. US Freightways was a marketable asset when it was a mostly non-union carrier. There is not a company alive that would currently invest in a union carrier with the economy and freight market what it is today. At least not without the help of the Teamsters "pension" fund. I do not want to see yet another carrier go bankrupt because unfortunately alot of good people are affected. But, unless the economy gets a quick and sustainable fix I feel it may be inevitable. God bless all of you that are still out there fighting the battle !

Jan 05 08:02 PM

[Valley View:]

Everyone W/a direct involment in these companies can & should continue to work at what you do BEST @ your jobs. YRC is a LEADER in this industry & will continue to work, along W/ it's employees to get through this though economy. Let' not limit our focus on any one company & ignore the finanical crisis that has effected all aspects of our lives,even our family's life. YRC has,can and will continue to suceed in getting through this crisis confronting ALL of Us.....As will YOU............

Jan 14 03:49 PM