Yellow Corporation: An Attempt To Escape The Pothole
Summary
- Yellow Corporation may have shown improvement in its financials over the past decade, but achieving profitability and stable growth is still a long process.
- Dividend payments are out of the question as viability and cash inflows remain low with increased borrowings.
- After the stock price continuously decreased and eventually hit the bottom in the previous year, it gradually shifted its direction to start a bullish pattern.
- The reopening of the economy may stimulate recovery and growth in the company and the whole industry.
Yellow Corporation (NASDAQ: YELL) has been through a lot from its struggling financials to the adverse effect of the pandemic. Although improvement has become evident, achieving stability and substantial growth is still a long process while the possibility of dividend payments remains low. Nevertheless, the upward pattern of the stock price conveys optimism as the economy reopens which may help the industry recover and bounce back.
Company Financials
Operating Revenue and Operating Costs
From a horse-drawn hack and a Model T Ford, Yellow Corporation has increased its operations and flourished over the years. In the 2000s, it had numerous acquisitions that further expanded its capacity and coverage. It had substantial growth in the core operations as revenues tripled from about $3 billion to $9 billion. However, its struggles to optimize its costs and maintain efficiency led to its contraction as revenues plummeted to $4-$5 billion. Moreover, the boom in the industry enticed more business openings and increased competition which affected the demand and revenues of the company.
In 2010, the operating revenue eventually dropped to $4.36 billion after several years of contraction. It started to expand again in 2011-2014 from $4.88 billion to $5.06 billion and showed its adjustments to the changing market environment. Although YELL regained its footing and protected its operations, its potential to bounce back is yet to be achieved. It had ups and downs for the next few years, but changes have become quite manageable.
Revenues decreased again to $4.7 billion before increasing again to $4.88 billion in 2016 and 2017, respectively. This can also be seen in its efficiency to respond to the market and operational changes. The operating costs followed the pattern of the revenues although they were managed well which caused gross profit margin from 64% to 72%. In 2019, the contraction happened again as revenues decreased from $5.1 billion to $4.88 billion which was in line with its goal to improve its profitability and adequacy and match the demand with its capacity.
Moreover, as its network optimization plan continued, it started to reorganize and consolidate its main and back-office operations. In 2020, revenues in all quarters decreased but did not seem to have more adverse effects on the company due to the impact of the pandemic. The contraction was timely and relevant and became a strategic move on its part as it reduced the risks the market disruptions could have caused.
Hence, the decreased size helped it realize a higher gross profit margin of 70%. It may also be reasonable since quarantine measures restricted the operating capacity and supply chain of most businesses which reduced their output. Moreover, its gains in the core operations included gains from property disposal as part of its transformational goal and as a sagacious move amidst market disruptions. But the delivery and shipping industry remained an industry favorite despite shortages of drivers as e-commerce and online transactions became a fad in most countries. This may be one of the primary reasons behind its maintained efficiency despite limited operations.
Meanwhile, the reopening of the economy this FY may be a game-changer as it may improve the strategy of the company due to pent-up demand for most products. With more reopenings of businesses, more transactions are expected. As more labor, output, and purchases are expected, it may increase deliveries and shipping. With that, it may choose to increase its capacity to match with the potential hype in the market or maintain its current size to ensure a higher margin.
This is possible as QTD revenue has already increased by 3.9% despite the decreased shipments in February. Moreover, the expansion of its Regional Next-Day Service in the Mid-Atlantic Region is another step towards the consolidation of its brands into a super-regional LTL carrier which will be discussed later.
Taken from Macrotrends
Taken from Macrotrends
Taken from Macrotrends
Net Income and EBITDA
The problem with the company and the industry's capacity and demand was ultimately reflected in the changes in net income and EBITDA. Since it has narrowly avoided bankruptcy, it is good to observe that the profitability of Yellow Corporation has improved over the past decade. But sustaining adequacy and stability may still be a long process. The problems with efficiency can be seen in EBITDA due to its wide gap with net income.
It means that Depreciation and Amortization consumed a substantial part of its costs and expenses, not to mention that it could hardly optimize its operations due to increased competition. Moreover, borrowings have generally increased and pushed interest expenses upward. While these expenses are non-cash in reality as no cash outflows were accounted for, these may pose threats to the operations.
Nevertheless, the upward pattern of both accounts shows that it has learned a lot and survived the industry’s overcapacity. The contraction in 2008-2010 may have helped it determine its optimal size and improve its viability as shown how the core operations started to expand again in 2011-2018. But with its contraction in 2018-2020 conveys that it is yet to determine the optimal amount of operations. Although it seems that it has started to bounce back, it would still have to move further to generate positive income.
In 2020, it reduced net loss to half and increased EBITDA by 8% despite the pandemic and proved its resilience which has been proven when it narrowly avoided bankruptcy several times over the past decade. The other accounts and transactions in the non-core operations did not have substantial changes and showed that its potential growth relied almost solely on the core operations. It has been increasing yet stability remained quite elusive.
With that, it may be a wise move for the company to pursue its goals to reorganize its operations across the region to consolidate its main and back offices. The reopening of the economy may increase employment, purchasing power, and pent-up demand for most products and services. The plan to improve its supply chain is timely, given the potential increase in revenues. With the disposal and replenishment of property and equipment, its goal to improve efficiency and manage depreciation and amortization is possible. If the optimistic view of market changes this FY turns out right, the execution will be easier for the company.
Taken from Macrotrends
Taken from Macrotrends
Liquidity
The company has maintained ideal liquidity ver the past decade with its Current Ratio exceeding 1 except in 2010 and 2019. Note that cash and cash equivalents and receivables comprise more than 90% of the current assets. These are mostly liquid assets and can easily cover current liabilities should it decide to make a single payment. With their upward pattern, one can prove that the demand for the company remains increasing as verified with the changes in the operating revenue and gross profit.
Moreover, cash and cash equivalents increased by $370 million from $110 million in 2019 to $480 million in 2020. The only thing that may hamper its potential is the dramatic increase in its outstanding borrowings from $900 million to $1.28 billion. The company must remain keen, especially since it has started to transform operations across the region and may affect its refinancing and capital structure.
On the other hand, Free Cash Flow ("FCF") has also been generally increasing but is yet to stabilize. It seems to verify the need to improve income growth. As consistency can still be proven, YELL needs to continue optimizing its core operations to ensure income and cash inflows. With its movement from -$66 million to -$16 million, FCF confirmed adequacy improvement although it still has to work on stabilizing its core operations. Moreover, increased Capital Expenditures ("CapEx") conveys that it continues to replenish its fixed assets to determine its optimal size and sustain its operations. It remains in line with its plan of regional expansion and consolidation which may require newer equipment and vehicles once the economy fully reopens.
Taken from Macrotrends
Taken from Macrotrends
What's in Store for Investors?
Dividends Per Share
Yellow Corporation does not currently pay dividends, and given its current position, it remains out of the question. Net income, EBITDA, and FCF have been moving in a generally increasing pattern, but the value remained inadequate to suffice it. While stability is still a concern, realizing adequately positive income will still be a long process. Despite this, it continues to determine its optimal capacity or size and other ways to optimize its costs and improve efficiency and viability. The focus of the company is on the regional expansion and its transformation into a super-regional LTL carrier. Given this, an investor may not expect any ordinary or special dividends soon.
Stock Price
The stock price has lost a huge part of its original value when its voracious expansion and acquisition matched with increased competition almost bankrupted Yellow Corporation. From 2016, the decreasing pattern became more evident before eventually reaching the bottom at $1.36 last April 2020 when the stock market crashed at the height of the pandemic. But since then, the recovery started an uptrend that has been observed for the next few months.
Although the Price Ratios do not seem to agree with a bullish pattern for almost one year, the gradual improvement in the fundamentals and the optimism of the investors seem to put upward pressure. With the current momentum and the plans of the company which promises further improvement in viability and growth, the increase may continue although 1Q Report may still have a substantial impact on the price changes.
Potential Growth Catalysts
The Reopening of the Economy
Deliveries and shipping became a staple at the height of the pandemic as most people were forced to stay home and chose to do most transactions and purchases online. However, safety measures did not go along with it as restrictions were implemented to hamper the pandemic. The industry has faced delays in the operations and deliveries which affected its revenues and efficiency. Yellow Corporation was not spared, but as it has started to reorganize and contract beforehand, it has remained in line with its goals.
It managed delays and risks well despite shortages in drivers and even improved its profitability. With the reopening of the economy, a surge in purchases and other transactions due to pent-up demand is expected. Also, even if more businesses may reopen, work-from-home or a hybrid-work setup may be observed this FY since safety measures will still be observed. With that delivery and shipping will remain a key player in the new setup.
Regional Expansion and Consolidation of Operations
Since 2019, the company has started to reorganize its operations which remains in line with its goal to improve efficiency and optimize costs and expenses. It started to dispose of the less efficient properties and equipment and replenish the performing ones which may be the reason for its gradual improvement in gross profit margin and net income in 2019-2020. With its goal to fully operate as ‘one company, one network, one platform’ it aims to simplify or synergize its operations and expand across the region with its subsidiaries.
This may fasten the delivery time and maintain its next-day delivery service. Its expansion in the Mid-Atlantic Region in February is another step towards it. This is timely as the hype and pent-up demand in the market as the economy continues to reopen may cause a surge in deliveries and shipping. With the company’s gradual yet continuous preparation, this may be a giant leap if the market goes along with the optimistic view of many analysts. Given its potential increase in revenue and efficiency, gross profit margin may continue to increase and the company may realize positive income and cash inflows.
Conclusive Insights
Yellow Corporation had voracious expansion and acquisition that tripled its operating size and capacity in a relatively shorter period. However, it also increased its borrowings while tightening of competition affected its performance. Although it avoided bankruptcy several times, it hurt the company that it had to cut its operations to half. Over the past decade, it has gradually improved, given the increased gross profit margin, EBITDA, net income, and FCF. It managed its liquidity well with increased cash and receivables and showed better core operations. Nevertheless, it is yet to stabilize its operations and determine what size or amount of production will be optimal for it, given the changes in borrowings and depreciation and amortization.
With its new platform that may officially start in the latter part of FY 2021, this may speed up its recovery and achieve its potential growth. The expansion, matched with consolidation and choosing more efficient assets may improve its supply chain and increase its efficiency as higher demand and revenues are expected this FY. As the company focuses on fortifying its operations and increasing viability, dividends may not be expected soon.
Meanwhile, the uptrend in the stock price may continue although things may change as the 1Q Report may be released soon. But given its higher QTD Revenues despite lower delivery time and operations, things may be better for the company. Although the price ratios do not agree with the bullish pattern, the optimistic view and the plans of the company seem to outweigh the potential overvaluation. A long position is recommended as the increase continues, but reading more press releases and industry news will be helpful and strategic for the current and potential investors.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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