Con-way In Risky Position Despite Strong Management

| About: Con-Way Inc. (CNW)

Given concerns over a double dip, the iconic trucking company Con-way (NYSE:CNW) has a high degree of risk with its beta of ~1.9. Although the firm has made substantial progress cleaning up its balance sheet since it bottomed in 2009, net debt represents 22.6% of market value. Competitor Arkansas Best Corporation (ABFS) meanwhile has a net cash position that represents 16.8% of its market value, in addition to having a lower, but still high, beta of ~1.5. Over the last twelve months, shares of Con-way fell by 19.1% versus 17.7% for its competitor. The S&P 500 meanwhile is up 2.6%.

From a multiples perspective, Con-way is more undervalued than ABC with the respective stocks trading at 12.8x and 16x forward earnings. In addition, Con-way also has a dividend yield that is approximately 81 basis points higher than ABC at 1.41%. With my conservative EPS expectation for $2.20 in 2012 and assuming a multiple of 15, I find the rough intrinsic value of Con-way to be $33/share. In my view, there are equally risky stocks with higher growth potential available, particularly as I have underlined here. Analysts currently rate the stock more towards a "buy" than a "hold" - just slighly better than competitor ABC.

At the same time, I believe that management is taking the necessary steps to maximize shareholder value in the longer-term. Price increases have been appropriate and resulted in higher revenue, despite negative volume effects. While trends normalize, the supply chain is being made more efficient to grow the bottom line. I model EBIT margins growing from 1.6% in 2010 to around 5.6% in 2013 - a substantial amount that will optimally position the company to focus on scale expansion thereafter.

At the third quarter earnings call (see transcript), CEO Doug Stotlar noted:

Our results for the third quarter demonstrated improvement across the board as each Con-Way operating segment recorded increases in revenue and operating income compared to last year. The company’s performance in the quarter reflects the consistent execution of our strategy. For the third quarter of 2011, Con-Way reported consolidated revenues of $1.38 billion, up 8.4% over last year’s $1.27 billion.

On an operating income basis, we earned in $61.1 million in the 2011 third quarter compared to $12.5 million we reported last year. Diluted earnings per share were $0.52, this compares to a loss of $0.15 per share in the prior-year period. Last year, our third quarter results were negatively impacted by goodwill impairment and other charges totaling $21.9 million. Excluding these charges, on a non-GAAP basis, earnings in the 2010 third quarter would have been $0.22 per diluted share.

Going forward, I remain concerned about commodity volatility and possible unionization. Should these issues not occur as expected, shareholders will benefit from resulting higher-risk adjusted returns. I model revenue growing by 9% to around $5.4B in 2011 and then by 8.4% and 6.4% more in the following years. Improving tonnage yields and growth in Truckload and Freight will push the company forward and help make up for slightly lower growth in Menlo logistics.

Consensus estimates for EPS are that it will increase by 253.2% to $1.66 in 2011 and then by an average of nearly 30% in the next two years. Of the 8 revisions, 7 have gone down and 1 up. Given the size, these are shaky estimates, in my belief, and will only reinforce the high beta in returns to short-term shareholder value. Holding out until concerns over a double dip clear may be the best investment strategy here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.