YRC Worldwide: A Compelling Short Idea 13 comments
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Con-Way (CNW) released earnings on Wednesday night which fell short of consensus estimates and reduced guidance for the full year. The Company cited what everybody in the trucking industry has been feeling: a combination of a soft freight environment coupled with weakening prices. From all indications, the second half rebound that gurus on Wall Street were expecting seems to be dead and expectations seem to be coming in, with a 2009 recovery the new mantra amongst the crowds.
All this brings me to a very interesting short idea. YRC Worldwide (YRCW) is the largest LTL carrier in the industry. LTL for those of you not familiar with trucking parlance stands for Less-Than-Truckload. Carriers such as YRC Worldwide consolidate multiple loads from various shippers into one tractor / container and haul it to a distribution center where it is unloaded, sorted and then delivered to the final destination.
I will attempt to identify why YRC today represents a compelling short opportunity.
Operational Issues / Setbacks: - YRC has struggled to integrate it’s acquisition of both Roadway and USF. In early January, the Company decided to take actions by shuttering terminals in its regional operations. The Company today operates its subsidiaries as standalone entities with no integration whatsoever. This is intentional and is aimed at preserving the brand equity of Yellow, Roadway and the USF brands. How sane this idea is, I leave it up to you to decide. Management turmoil has been another issue with YRC with a couple of recent departures amongst its key executive ranks.
Weak Freight Environment: - With a weak freight and ongoing operational turmoil, other LTL carriers are starting to pick away at YRC’s market share, which can cause the Company to undercut on pricing to preserve volume at the expense of yields which can have a significant impact on its operating profitability. Con-Way on its conference call highlighted increased price competition in the LTL space, and indicated a major carrier to be involved in price competition. By law of elimination, the most obvious identity of this large player is YRC. More on that later.
Financials: - The Company in a recent investor meeting highlighted that the continuing soft freight environment continues to impact its business. When asked about specific trends, the CEO highlighted that Q1 was shaping up to be very much like Q4, 2007. If that is any indication, than Q1 is going to be an unqualified disaster. Additionally, the Company was quick to point out that adverse weather conditions were also playing a major role in impacting its operations in Q1.
We all know what it means when management starts blaming the weather. The Street expects YRC to lose money in Q1, but I believe the miss can be significantly greater than what analysts are currently predicting. Ok so what if they miss, eventually the freight environment is going to turnaround and they being the largest player will be the greatest beneficiary of such a turn. Right? Wrong. This unfortunately is what many on Main Street and Wall Street are predicting.
However, one very important component of the YRC story is leverage. YRC has about $1.2bn of debt on its balance sheet as of December 31, 2007. There is a credit agreement in place that was effected in August of 2007 that provided the Company with access to capital. However, that capital comes with some constraints including a debt covenant of Debt / EBITDA of 3.0x on a trailing basis. This is a maintenance covenant meaning that the Company cannot exceed its debt level beyond 3.0 times its trailing EBITDA at any time.
Ok, so what? Well with a dismal Q4, 2007 and an equally if not worse Q1, 2008 expected, the Company can be very close to breaching its covenant. With Con-Way confirming that the remainder of the year is going to be nothing to write home about, all of a sudden we find YRC walking a fairly thin line. Given that YRC is the largest carrier in the LTL industry, I do not think that the Banks that lent money to the Company will force it into bankruptcy if it were to default on its covenant. However, they may alter the terms of the credit agreement and increase the interest rates they currently charge. (Please see credit agreement filed in August, 2007 for further details.) or secure their capital against YRC’s facilities etc.
Additionally, YRC has $225 million of debt coming due in December, a $40 million acquisition payment due sometime between Q2 and Q3 of this year and a refinancing of its ABS facility in May. With a challenging macro environment coupled with continued operating struggles, I believe that there is a good possibility that the Company does not generate any free cash flow this year. Further, if tough freight conditions continue, bankruptcy could suddenly not become a remote possibility. If what happened with Bear Stearns was any indication of the severity of a run on the bank, shippers seeing that their carrier is in financial distress can pull their freight and take it elsewhere. Such a situation can be the death knell as the reverse operating leverage can very quickly end the fortunes of the Company.
When YRC shuttered some of its terminals earlier this year, some shippers were quick to pull their freight away from YRC citing uncertainty regarding its operations.
So can someone acquire the Company and turn it around? Sure someone can, but the question is will they and if so at what price. YRC has an off balance sheet liability of $3.5 - $4.0bn dollars related to its participation it the Central States Pension Fund. UPS which was also a contributor to this fund recently forked over $6.0bn in cash to get out of this program. Thus whosoever decides to acquire YRC would have to bake that into the purchase price. So now let’s do some very basic financial modeling to get at YRC’s current valuation.
Share Price: $13.84
Shares O/S: 56.658
Total Market Cap: ~$784 million
Less: Total Cash: $58.2 million
Add: Total Debt: 1.2 billion
Add: Total Pension Liability: $3.5 billion (let’s use the lower number of the range.)
Enterprise Value: $5,425.8 billion
EBITDA (2008E Reuters Estimate:) $478 million
Thus YRC trades today at 11.4x Forward EBITDA. You have to include the pension liability when doing the calculation as this is how any strategic or financial buyer would value the Company.
Con-Way, a well run Company prior to last week’s haircut was trading at 5.7x Forward EBITDA. Go figure!
Thus in conclusion, YRC is one truck that I would stay far away from. Somehow, a struggling Company operating in a tough freight environment at a robust valuation does not seem too appealing for me to go long. Please do your own diligence.
Disclosure: None
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This article has 13 comments:
competitors have been trying to destroy YELLOW for as long as i've been here.
they can't, we move freight better and faster than they can even with our slower trucks.
the author of this article sits in an office in a financial center and reads all sorts of macro crap.
he knows nothing of 'lane density' 'claims ratio' 'trailer pool' or 'system balance', if he did he would understand that right now we're in 'survival mode'.
we went there last year.
the way you tell a carrier's strength is very simple, look at the tires and brake linings.
by the way genius, where did you cull the figure for pension liability?
all of us teamsters' pensions are administered by the teamster pension plans we're enrolled in.
next november i'll be getting about 3400$ monthly for 13 months annualy plus healthcare for me and my wife and 1800$ from social security.
65 grand annually aint too shabby for retirement is it?
if the economy is still in the toilet i'll keep working and collect social security simultaneously for a 100k annually.
look around you, everything you are in contact with was handled by an LTL carrier and we're the biggest an best.
ps; when the chinese operation kicks in just remember we're the only ones that can move LTL between china and the usa door to door.
Wow! when are people ging to wake up.
The bread line starts at the back of the truck.
I would like to address MIKEEEEE at this time.
Now MIKEEEEE, I did spell your name right didn't I, that's with five E's right?.
OK, lets do the math, if you have been driving, like you say for 45 years, that means you were born smewhere around 1940 or maybe 1942, so that puts your age between 66 or 68, which to me that means you are now a worthless YRCW employee, in other words excess baggage to your company.
If you are so loyal to YRCW why did you not retire and make room for a younger Teamster that probably needs a job, you know why?, because hangers on like you are greedy and pretend to have this false loyalty to a company that sooner or later is going to give you a well deserved screwing. Ok, that's number one.
Number two, Competitors will always try to, as you say, destroy the
competition, it's the nature of the beast.
Number three, the author of the article you are reffering to probably does sit in an office and probably behind a desk because, in case you did not know, thats the best way to do office work, like when you are driving you do have to be sitting down right?, unless you are napping on overtime.
He may not know about " lane density", "claims ratio", "trailer pool"
or "system balance", oh by the way, have you been kissing up to
a Operations Manager? you learned some mighty big words fella.
But one thing Simms knows is money and bottom lines and every thing else that has to do with money that you know nothing about.
"Survival Mode", that is one thing YOU better start thinking about,
because if you ever retire you are going to be in big trouble when YRCW goes bankrupt and they don't have any money for the pension liability, don't count on the Teamsters to help you or the goverment for that matter. So there you go MIKEEEEE, here is where the well reserved screwing comes in.
Number four, the way to tell a carriers strength its by its top management, or in Bill "Big Dollars" Zollars case damagement, and
of course did you forget about the O/R; Operating Ratio, I did not see that phrase any where in your comment, maybe you were kissing up to the wrong Operations Manager. Listen since when have you been checking brake linings?, I thought you were a big time driver, you might be in the wrong Union Pal.
Number five, again Simms has more information at his finger tips then you have in your whole brain, and with that information he was able to CULL that figure for the pension liability, OK?.
Number six, that's what I am worried about the Teamsters handling my MONEY, samarten up DUDE.
As for you MIKEEEEE, did I spell that right?, projecting your pension,
your health care and Social Security at about $65,000 per year idicates to me that you have been sniffing diesel fumes all of your forty five years of driving. And for you to even mention that you will keep on working and make $ 100,000 per year even if the economy is still in the toilet and after your retirement from driving, only proves that you have gotten senile. I suggest that you start looking for a HOME!.
Number seven, of course almost everything we come in contact with on a daily basis is handled by an LTL carriers, but in case you have not noticed, there are also non union carriers that do the job for less, hey !! did I catch you off guard. YRCW might be the biggest but not the best, I'm sorry to say.
Number eight, as far as the Chinese operation ia concerned, that's
Bill" Big Dollars" Zollars baby and that is one of the major reasons we are in the situation we are in.
Oh, one more thing, check ABF's numbers they are always up, see MIKEEEEE With five E"S, thats were good management comes in,
so with good management, the O/R that we were talking about before kicks in, OK?, NOW, PUT THAT IN YOUR SMOKE STACK MIKEEEEE THE LOYAL EMPLOYEE.
I also work for YRCW, and our Oerating Ratio right now, if I'm not mistaking is about 102 maybe 104, if you understand what that means, it means dismal.
Don't think I'd mention OR either, unless I worked for, say, ODFL, ABFS, or Con-Way, in which case, it might not be so humiliating. Perhaps paying drivers as much as MIKEEEEE describes is a minor contributing factor.
You sound like you know the firm. Can you comment on why YRCW insists on continuing to run its acquisitions as separate firms? Why are Yellow, Roadway, and USF segments on separate IT, using separate sales forces, run separate executives? If you were in charge, would you not try to run the firm as a single entity? This is hard to comprehend from the outside.
Thanks.
wow if you would have shorted YRCW on 4/21 you really would have made a killing after friday's close.
it's ok though this aint my first time at the rodeo.
ps; i also own the domain name 'mikeeeee.com'
it's a lot better than hotmail or yahoo or sbcglobal.
buffet or the chinese will take us out soon.
look for the big announcement monday.
rumor has it they're passing out mandarin chinese language courses tomorrow.
On Apr 22 08:07 AM MIKEEEEE wrote:
> i've been driving trucks for 45 years and for YELLOW the last 20.
>
>
> competitors have been trying to destroy YELLOW for as long as i've
> been here.
>
> they can't, we move freight better and faster than they can even
> with our slower trucks.
>
> the author of this article sits in an office in a financial center
> and reads all sorts of macro crap.
>
> he knows nothing of 'lane density' 'claims ratio' 'trailer pool'
> or 'system balance', if he did he would understand that right now
> we're in 'survival mode'.
>
> we went there last year.
>
> the way you tell a carrier's strength is very simple, look at the
> tires and brake linings.
>
> by the way genius, where did you cull the figure for pension liability?
>
>
> all of us teamsters' pensions are administered by the teamster pension
> plans we're enrolled in.
>
> next november i'll be getting about 3400$ monthly for 13 months annualy
> plus healthcare for me and my wife and 1800$ from social security.
>
>
> 65 grand annually aint too shabby for retirement is it?
>
> if the economy is still in the toilet i'll keep working and collect
> social security simultaneously for a 100k annually.
>
> look around you, everything you are in contact with was handled by
> an LTL carrier and we're the biggest an best.
>
> ps; when the chinese operation kicks in just remember we're the only
> ones that can move LTL between china and the usa door to door.
On Sep 05 04:04 PM nazdak wrote:
> Anyone else concerned with YRC's lack of caring when it comes to
> their debt? The spread sheets are lousy, the freezing of Mgmt. pensions
> to scrape enough to try to show positive earnings, and they still
> proceed with more acquisitions. I really thought they turned the
> corner in Q2, I guess I was wrong. If Zollars can find a way too
> show 1.15 per share in Q3 like projected, without all these curtailments,
> and supposed accidental charges, I'll be shocked. This companies
> financials are in sad shape.
We are by far the best in this biz...our customers love us! They will only leave us if you continue to mismanage.
Lets get it on Bill! .....let us loose on the competition....finish the integration ...and let us kick the competition's asses all the way to China!