Earlier this week, I posted an article outlining what I saw as the bullish case for buying shares of Arkansas Best Corporation (ABFS). ABFS is an LTL (less-than-truckload) carrier that competes with YRC Worldwide (YRCW), Old Dominon (ODFL), UPS (UPS), Fedex (FDX) and others, whose stock price has been decimated recently. At yesterday's closing price of $8.35, I believe this profitable company with a reasonably strong balance sheet trading at less than half book value is a compelling buy for those with a longer time horizon.
Yesterday morning, Judy McReynolds, the President and CEO of ABFS, spoke at the 2012 RBC Capital Markets Global Industrials' Conference. While her comments reinforced my bullish stance on ABFS, she made a number of important points not covered by my previous article:
- The recent pricing increase is holding up. Right now there is a tug-o-war between weakness in manufacturing and pricing increases. ABF's tonnage volume is slipping, according to Mrs. McReynolds, specifically because the manufacturing sector's weakness directly impacts a number of their customers. The net result is that the seasonally expected increase in the operating ratio this quarter will likely not materialize. However, she did emphasize that pricing is stable even with the softening of the market, adding, "the general rate increase is holding just fine and it is in line with our expectations." While a softening economy is not good news, rational pricing (by the other carriers) is great news for the LTL industry and should help them navigate this soft patch.
- The ABFS "niche" is alive and well. When asked about increased competition on the harder to handle freight, she implied that it is business as usual. Saddled with higher labor costs in a quintessential commodity industry (freight is pretty simple--ship a product from point "A" to point "B"; and if someone can do it for cheaper, well, that is pretty compelling), ABFS has developed a reputation for professionally handling the difficult, the delicate, and the "got-to-be-there-tomorrow-by-noon freight." This is how they justify the higher price for the time-being, and they appear to be mostly fending off the competition.
- ABFS is completing an internal review to create more efficiencies that lower costs. My earlier article listed numerous catalysts for lowering costs and promoting growth. Mrs. McReynolds described the process now underway to identify other areas where costs can be stripped out without sacrificing the customer experience: using technology to remove some of the labor costs, replacing equipment that is expensive to maintain and that will result in lower operating costs, and the ongoing upgrade to 2010 truck engines that will boost fuel efficiency.
- The recently acquired Panther Expedited Services should be able to increase their internal rate of growth. Panther is a logistics provider that just like ABF enjoys a reputation for doing the difficult very well. As stated in my previous article, Panther has historically grown their revenue and profitability, and analysts generally see logistics as a good growth industry. However, Mrs. McReynolds indicated that "Panther was previously strapped so they couldn't do what they wanted." That will no longer be the case. The newly unfettered Panther will now have the financial backing to pursue the growth opportunities that look most attractive, likely resulting in an acceleration in their near term growth rate.
- ABFS still has dry powder (CASH) and will pounce if the right opportunity comes along. When asked about their balance sheet, she emphasized that they didn't have to use debt financing to do the Panther deal--they just got excellent terms. Today they still have north of $120 million ("and growing") in cash on their balance sheet and can afford to be opportunistic with respect to new acquisitions or in funding more internal growth initiatives.
- Their addressable market has just been increased six-fold. Mrs. McReynolds reiterated that providing an "single source, end-to-end solution...is what our customers were asking for." She commented that now "we are in a $200 billion market instead of a $34 billion market." The following graphic from their June presentation introducing the acquisition illustrates the new breadth of their market (click to enlarge image):
The Bottom Line
Investors willing to wade through a period of potentially negative quarterly comparables and analyst target price reductions will have, I believe, a brighter future to anticipate. The hope for more rational future pricing in the LTL industry, ABFS' unrelenting internal focus on stripping out costs everywhere possible, and a much larger addressable market are just a few more reasons beyond the catalysts for growth cited in my previous article.
As Mrs. McReynolds stated,
The stock price is in a place that doesn't make sense to me at all. The opportunities we have from here are material and good. And I know there are some concerns and risk factors, but gosh, they are already priced in and more.
My thoughts exactly.
Disclaimer: This information from the author is not to be construed as investment advice for you or your situation and should be nothing more than a starting point for your research on this security. Do your own homework. There is no guarantee that the author's conclusions are correct.
Disclosure: I am long ABFS.