We announced our bearish view on YRC Worldwide (YRCW) in our review July 25, when it traded above $1 per share. Its shares have since fallen over 95%, closing yesterday at just under 5cents. With the threat of bankruptcy out of the way, at least for now, and the impact of the impending re-structuring finally factored into the stock price, we believe that shares have now entered value territory, and it may be safer to start building a small speculative position in the stock.
In our original piece July 25, we argued that with the impending re-structuring, existing shareholders would be left with a paltry 2.5% equity control, with lenders getting 72.5% and the labor union getting 25% of the control. This implied a market-cap post-restructuring of almost $2 billion at $1 per share. We argued that at $2 billion, the stock was expensive compared with its peers, especially keeping in mind YRCW’s operational and competitive issues. Thereby, we suggested taking the opportunity to sell into any rallies in the stock.
While YRCW after flirting with bankruptcy for at least two and a half years has finally avoided it, at least for now, it has done that by throwing existing shareholders under the bus. That sign has been there on the wall for some time for all who have wanted to see it. At yesterday’s closing price of under 5cents, the market has finally factored into YRCW’s stock price the impact of the dilution of existing shareholders from the inevitable re-structuring. But as happens often times, we believe that this time the market may have over-reached in correcting YRCW to the downside.
We believe that after the steep drop-off, YRCW shares are finally approaching value territory. While the company is still bleeding losses, it is bleeding less and less every year and every quarter. Furthermore, its free cash flow (cash flow from operations minus CAPEX) is better than net income and is rapidly approaching positive territory. Also, in the most recent quarter, the company actually beat analyst revenue and earnings estimates, and reported revenue higher than the year-ago quarter. Sure, YRCW has its share of problems, including stiff competition from rival trucking companies Arkansas Best Corp. (ABFS), Con-way Inc. (CNW), Knight Transportation (KNX), as well as from freight companies United Parcel Service (UPS) and Fedex Corp (FDX). However, at an implied market-cap post-restructuring of under $200 million, shares have finally entered value territory, trading at just 0.04 times’ projected 2012 revenue of over $5 billion. As a comparison, rivals ABFS, CNW and KNX trade at a price-to-sales ratio (PSR) of 0.21, 0.23 and 1.1 respectively, and UPS and FDX trade at a PSR of 1.1 and 0.5 respectively.
Sure, those companies are profitable, but a post-restructuring YRCW will be stronger as the threat of bankruptcy and further dilution is removed, at least for a while. YRCW operates internationally, including in the U.S., Puerto Rico, Canada, Guam, and Mexico; and it has strong brands, including iYellow Transportation, Roadway, Reimer Express, USF Holland, USF Reddaway, USF Glen Moore and New Penn. So, even if we give YRCW a PSR equal to half the lowest PSR among its peers, or at 0.1, shares could easily more than double from here. However, with the shares currently in free-fall, we would gradually build a position taking advantage of any further dips. Furthermore, shares are likely to weaken when the company announces the inevitable 1-for-100 (or something like that) reverse split sometime before the end of the year, and we would save some fire-power to take advantage of that weakness.