A few months ago I wrote an article on YRC Worldwide's (YRCW) future as a company. Since then, the stock has more than tripled and gained a large amount of momentum with multiple upgrades by various banks as well as had interesting positions taken up by large funds. With earnings around the corner, I wanted to update individuals on what has happened to YRC Worldwide in recent weeks and clarify why it has garnered so much momentum as well as take a look at some aspects of the company, industry, and stock that have gone unnoticed amid recent unexplained volatility.
Careful Who You Listen To
In Recent days, it is evident that the short interest on YRCW has grown dramatically. With earnings around the corner on July 29, this once neglected position is gaining volume. With its growing volume and volatility a number of false rumors have spurred through the financial ecosystem. Many of these rumors, which range from claims of immediate share dilutions to individuals claiming they've seen YRCW's profits ahead of time, have been rooted in completely false facts and have been derived from comments and financial message boards. Interestingly enough, these rumors, in unison with technical short selling and the liquidation of positions, have resulted in the stock price contracting significantly in the last two trading sessions. That being said, it could potentially be a good buying opportunity for interested investors. However, the question everyone is wondering is what the future of the company will turn out to be in the short term, especially with regards to its second-quarter earnings. The following paragraphs will shed light on the following quarter and discuss the direction it is likely to go in.
Q2 Earnings For YRC Worldwide
As I did in my last report on YRC Worldwide I have examined the ATA (American Trucking Association) tonnage index to get a better idea of how YRC Worldwide will perform in the next quarter. Interestingly enough, both April and May have had the highest growth in year-over-year gain since December of 2011. In the overall month of April the trucking tonnage index was 4.3% higher than last year and in the month of May it jumped a shocking 6.7%. This drastic rise in the amount of matter shipped nationwide will reflect well on various trucking companies across the board. The ATA Chief Economist Bob Costello even stated,
"While we heard good reports regarding Freight levels during May, I have to admit I am a little surprised at the large gain in tonnage... After bouncing around in a fairly tight band during the previous three months, tonnage skyrocketed in May."
The ATA compiles its monthly index by surveying its carrier members on the amount of tonnage they've hauled within each month of the year. Subsequently this increase in the tonnage index could easily push YRC's overall revenue up in its Q2 earnings report. As a testament to this notion are the recent earnings released by the trucking company, J.B. Hunt Transport Services, Inc. (JBHT), which posted its earnings on the 16th and had a 10.2% growth in year-over-year revenue in its second-quarter earnings. If YRC Worldwide releases even a "decent" revenue increase it will easily soar into the mid $40s and higher and if it were to get numbers anywhere near those produced by JBHT (such as a 10% revenue increase) then the company is likely to grow anywhere between 50-125%.
What This Means For Shareholders and Risk/Benefit Analysis
From a logical standpoint individuals with Calls/Puts and or Short positions in YRC Worldwide should beware in the coming weeks when utilizing technicals to cast short-term positions. The reasoning for this is the high and inexplicable volatility as well as the risk of increased major buy-ins by heavyweight bulls such as billionaire Marc Lasry's Avenue Capital, which just converted shares at a 34$ price target and other billion dollar hedge funds who already have long positions such as Prescott Group Capital Management, Jim Simons's Renaissance Technologies, Jeffrey Altman's Owl Creek Asset Management, and finally the Carlyle Group.
Many of these Funds are in YRC Worldwide for the long term and regardless of the next quarter's performance many of them do not intend to shed their positions. With that in mind, i forecast that the potential downside of bad earnings to be anywhere from 25-55% and the potential upside of positive earnings to be anywhere from a 50-125% increase in share value. Because of the volatile nature of such a position a recomended and strategic maneuver upon and or directly preceding the next earnings would be to buy august calls at around 20$, 25$, 30$ and 35$ strike prices due to the stock's overtly volatile nature.
It is apparent to anyone in private equity that YRC Worldwide is going through a considerable turnaround. The company's dedicated CEO James Welsh, raised confidence levels at the Wolfe Conference and outlined an ambitious future for the company in the years ahead. In addition, the company has already received considerable upgrades to outperforms and Buys by various financial organizations such as Zacks, UBS AG, BB&T Corp, Standpoint Research, etc. The majority of these upgrades recommend the stock for long-term positions, which can only be seen as reassuring. Ultimately, YRCW's Q2 revenues, should have the "winds at its back" being as it may that the overall tonnage index has grown so dramatically in recent months. All that being said, unless the trucking tonnage index has dropped dramatically in one of its consistently successful months (June) an increase in YRCW's Q2 revenues seems to be a very likely scenario.
Additional disclosure: I have Calls on YRCW