An Unbiased Look At YRCW

| About: YRC Worldwide, (YRCW)

YRC Worldwide (NASDAQ:YRCW) is one of the most debated "penny stocks", with investors on both sides of the fence having strong feelings regarding their opinions of the company. The stock has increased by 70% over the last 3 days, yet investors have debated why the gains have occurred. Some believe the stock lost too much of its value after restructuring its debt making it undervalued, while others believe the stock is simply being manipulated or controlled by short traders. Opinions are strong regarding this stock, therefore I will look at this company and its potential to succeed through an unbiased stance with no attachments to the company.

YRC Worldwide offers its customers a range of transportation services including global, national and regional transportation, as well as logistics. The stock trades with a market cap of $3.20 million, however, it's reported $4.61 billion in revenue over the last 12 months, by far the largest differential to market cap and revenue within the market. For this reason, some investors believe that YRCW is presenting value. Yet there are many who believe it's simply a trap. Let's look at what got the company to this point, and its fundamentals which could play a part in its future success.

The company's largest operational issue is that it's lost market share to competitors along with its inability to post a profit. The company has shown some progress over the last 12 months, outperforming 2010 revenue by nearly $300 million. Yet an increase in net loss has continued to control this company's fate, resulting in a dismal balance sheet.

YRC Worldwide's balance sheet over the last 5 years can be viewed in the above chart. The company's rising debt-to-asset ratio over the last 5 years is what sticks out to me. The company's revenue has also been cut in half during this period as a result of its lost market share within the industry. The loss of revenue and the company's inability to cut costs has resulted in this company being faced with near bankruptcy on several occasions.

YRC Worldwide's balance sheet is one of the most confusing aspects of this company, with it recently avoiding bankruptcy after completing a deal with its debt holders. Avoiding bankruptcy was a primary goal and since bankruptcy was avoided some investors have chosen to ignore the company's problems and give YRCW one more chance. The problem with the restructure of its debt is that it only buys the company more time, and if it cannot improve in several financial areas, then bankruptcy is ultimately inevitable.

The company still has long term liabilities that will take years to pay off, even if the company were to improve. And according to the company's 10Q it still has nearly $1.5 billion in debt, which is higher than it was during its most recent quarter. Some believe that during its restructure the company "wiped out" or canceled $1 billion of its debt, but the truth is that it simply avoided the debt by refinancing it, which eventually has to be paid.

The question I am asking is-- how will the company become profitable and pay off its restructured debt? Based on its recent performance I don't believe it's possible, there are too many changes that would have to be made. As of now, the company's business saving measures appear to consist of laying-off employees and restructuring debt, which will not result in profitability or pay off its debt.

The company places great emphasis on being an international company. I believe that if YRCW were to succeed, the company would have to limit its operations, as too many regions or segments within its operations are producing excessive loss. The company needs to scale back and focus on domestic transportation or its most profitable regions. The U.S. freight brokerage market is estimated at $50 billion a year, therefore I see no reason why YRCW cannot be successful by focusing on one or maybe two areas of business.

I believe that downsizing the company would be the best decision for YRC Worldwide, although there are still problems that lie ahead. The company has high debt, horrible margins, and returns a loss on its assets. Therefore I believe that more drastic measures need to be taken with no shortcuts along the way, if the company were to post any level of profitability. YRC Worldwide has dug a deep hole, and its only option is to make smart business decisions over the next several years and focus on profitability. Yet the company is giving no indication that it plans to make any drastic changes, and because of its financial situation it's running out of options with fewer organizations willing to bail it out. Unfortunately for shareholders, companies such as this can survive for an extended amount of time before finally locking the doors, which provides false hope to those that are willing to gamble or take chances. And since the company is publicly traded there are multiple institutional investors to finance the company, or some form of rights offering to keep the company operational far past the date in which it should file bankruptcy.

The company produces high revenue, allowing it to remain operational. This gives investors hope that the company can be salvaged. The next year will be crucial for this company, with decisions that will be the catalyst to either improve or result in a fast track to bankruptcy. The stock has performed well over the last few days, but if I were investing in this company I would be careful. Do not invest with a large percentage of your portfolio, because although the stock may seem undervalued, it has a substantial amount of problems attached to its value. The stock is expected to split by the end of the year, by some insane number such as 100:1. And splits usually don't work for small cap stocks, or large cap ones, take Express-1 (NYSEMKT:XPO) for example. XPO is a profitable company with a strong balance sheet, and it trades within the same industry, yet its split in September has resulted in a 40% loss of its value. The company has not lowered guidance nor given any indication that there is an operational issue, however it's lost a large portion of its value. In my opinion there are a large number of investors which only trade insanely "cheap stocks" because of their ability to be manipulated, with large amounts of volume. But when a stock splits the volume drops and the price usually falls by a considerable amount, look at Citigroup (NYSE:C) since it split. Therefore, I believe the gains are a result of shorts and traders manipulating the price and buying millions of shares. However, when the stock splits it may not appeal to the same group of investors, and I believe it will fall.

I may be wrong, but if I had to guess I would say the split will be bad news for investors of this stock, and after being burned by this company several times-- which includes now owning 2.5% of the company-- I believe it's rational to warn investors of this stock. I am not saying that it's hopeless, but if I was considering an investment I would wait until I see more progress or more proof that the company will post a profit at sometime in its future.

Disclosure: I am long XPO.

Additional disclosure: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy.