YRC Worldwide (YRCW) has been one of the most notorious money-losing stocks for investors since 2007 thanks to two recapitalizations and reverse splits of the company's stock designed to avoid bankruptcy. However, it has been good to those investors who recently bought in as YRCW has more than tripled in price since the start of May.
The major catalyst for the jump in stock price was its Q1 results, or at least that's what some people would like to believe. Operating income improved from -$48.8M in Q1 2012 to $9.9M in Q1 2013, a $58.7M increase on declining revenues. On the surface that appears great and exactly what the doctor ordered for the company, but you have to look at previous quarterly reports to get the full picture. In Q4 2012 consolidated operating income increased by $68.1M over Q4 2011. In Q3 it increased $53.4M. In Q2 it achieved its first operationally profitable quarter since 2008.
If these results were so great why didn't they cause the stock to rise back then? Instead the stock price simply saw a small bump then went back to trading in the $5 to $8 range because these results are not that good. Note that I am referring only to the company's operating income which does not cover interest payments on the debt outstanding so the company continues to erode the horrid looking balance sheet.
There is no reason for YRCW to have risen from $7 to over $25 solely in the few weeks immediately after the Q1 2013 report. The savings seen in Q1 appears to be no more than the carry forward benefit of cost savings and pricing discipline initiatives undertaken by the company in the early part of last year. If the market truly believed in YRCW's turnaround the stock price should have risen steadily from $7 to $25 or more over a longer period of time starting in the middle of last year when it first reported improvement in the financials.
In the Q1 report the leadership team spoke of further operational efficiencies that will lead to $25M to $30M in savings per year, a significant slowdown of the $50M-$60M a quarter we have seen from the company over the past four quarters. That's not nearly enough to get YRCW to profitability. Referring to the Bloomberg data below it has lost $80M over the last four quarters and continues to have negative free cash flow of over $90M, which is forecasted to be -$18M in 2014 by analysts. That number is based on an increase to revenue to $5.2 billion from $4.8 billion when the company has demonstrated that it is in revenue decline. So it looks like any improvement to the bottom line will have to be solely done through cost savings. I agree with the comments on May 3rd made by Credit Suisse which state that the Teamsters will look to capture an increasing share of improving economics as the company moves forward so no matter what happens it will always be an uphill battle for YRCW to report improved earnings.
Rather than being due to an improved market outlook, I believe the stock has moved up thanks to tricky headlines, faulty logic and a pump of the stock by various forces. The headline for its Q1 report was "YRC Worldwide Reports First Quarter Positive Operating Income for the First Time in Six Years" which can easily be misinterpreted or misspoken as its "first quarter of positive operating income in over six years." But its previous quarters had positive operating income and that did not impress analysts nor the market because YRCW still faces daunting debt issues even with these improved financials.
One example of faulty logic to the bullish case for YRCW is that the company looks very undervalued relative to revenue. Its revenue is around $5 billion and the market cap has just surpassed $200M so it has a 0.04 or 0.05 Price to Sales ratio. Arkansas Best Corporation (ABFS) has a ratio of 0.20 to 0.25 Price to Sales but has much lower debt so its Enterprise Value to Revenue metric is 0.25 while YRCW's is actually higher, hovering around 0.3. Con-way Inc. (CNW) has a P/S of around 0.4 with an enterprise value to Revenue being under 0.5. So when we consider its debt load and measure YRCW's revenue in terms of enterprise value the company is more or less inline with its competitors. Its very low Price to Sales metric doesn't represent a catalyst to claim a $150 target stock price on the stock, it represents the overall lackluster reaction the market has to sales in the very low margin trucking industry which is just magnified by YRCW's high debt load. If you truly believe that YRCW is undervalued in price by six-fold, then you have to believe the exact same for ABFS and CNW because there's no financial ratio that implies YRCW is cheap when compared to either of them when you account for the debt. YRCW is just highly leveraged, not undervalued.
Another catalyst to the sudden rise in YRCW's stock price, particularly that on June 25th was a target price of $50 announced by Standpoint Research. Up until this time I have never heard of Standpoint Research. They pride themselves on being the top research firm for accuracy as measured by Motley Fool at 68.6%. The firm did well, but who wouldn't do well when measured against 2008-2013, one of the biggest sustained bull runs on the US market ever, and the majority of your picks are bullish calls on high beta stocks? If you review my Motley Fool Caps score, you'll see that my accuracy score is 72.9% which beats its current score of 68.1% by nearly 5% over approximately the same time frame. So you can believe my short call on YRCW and have a slightly better chance of being right than by following its long call if you assume past performance is indicative of future results. Hundreds of players on the Motley Fool game have even higher accuracy scores than me. As in other words, it's not that hard to have very good stock picking accuracy when you are nimble in the market. Standpoint comparing itself to larger firms that don't have the desire nor the business plan to jump in and out of stocks and change targets every few months like it does is not fair.
Investors will have to come to their own conclusion about the legitimacy and the circumstances of Standpoint's $50 target price on YRCW. However, I find it interesting that its chose to release the $50 target now as opposed to several weeks ago like when Credit Suisse chose to update the target price to $7 shortly after the Q1 release. Nothing has fundamentally changed for YRCW to justify suddenly covering the stock in late June and a $50 target price would have looked a lot better when the stock was trading under $15 instead of over $25. I prefer the opinions of more well-known analysts like Credit Suisse as mentioned above as well as the opinions of the others listed below, like JPMorgan's target of $6 for YRCW among a bunch of holds and underperforms.
In early May it was made known to the public that YRC Worldwide tried to buy Arkansas Best. The proposal was refused by ABFS and even if it went somewhere at the time it would be a very tricky deal as YRCW was more than three times smaller in market cap when compared to ABFS. The rise in share price could be related to a second, more aggressive attempt to buy ABFS as the relative market caps of each company aren't as skewed as they were before. If that were to happen YRCW would have to dilute its stock significantly.
Rather than tripling in stock price based purely on improved market sentiment, I believe that YRCW has moved recently on misleading headlines and various schemes to pump up the stock price to an unsustainable level. If you look at the past price performance for the stock you'll see that it also had a great June two years ago in 2011, rising from a low of 57 cents on June 9th to as high as $1.89 on June 27th before collapsing to a few pennies in price by September. It is definitely buyer beware when it comes to YRCW while investors who like to short or put option buyers have an opportunity for a profitable trade.
Additional disclosure: I have recently bought put options.