A High-Flyer That Is Still Ridiculously Cheap

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In 2013, YRC Worldwide (NASDAQ: YRCW) has grown from a $60 million company to having a market cap of $240 million, a gain of more than 300%. While many assume that such large gains could indicate a potential pullback, I believe there is still unprecedented upside potential.

YRC at a glance

YRC Worldwide is a transportation company that operates in the industrial, commercial, and retail goods space. After producing almost a decade of continuous loss, from being a large cap company, the company has seen a number of catalysts that has catapulted its stock from the depths of all-time lows.

All of YRC Worldwide’s gains have been created since May. These large gains were jumpstarted after the company posted Q1 earnings, which included its first operating income in more than half a decade. Overall, the company made a $58.5 million operating improvement, and gave guidance to suggest that further improvements were possible.

Then, in mid-May, YRC Worldwide made a bid to acquire fellow transport company Arkansas Best (NASDAQ: ABFS). While YRC Worldwide is a company with zero growth that focuses on efficiency, Arkansas Best is a company with near 20% top-line growth. With more than $2 billion in annual revenue, the acquisition of Arkansas Best could produce a growth catalyst; one that is near profitable.

A company with deep value

What many people don’t realize is that with or without Arkansas Best, YRC Worldwide is still a massive company. People look at its $240 million market cap and assume that it’s a smaller company, but in reality, YRC Worldwide has more than $4.8 billion in revenue over the last 12 months.

YRC Worldwide is an interesting company. It operates in all segments of transportation but is not a consumer company per say. Therefore, it has similarities and differences compared to a company such as FedEx (NYSE: FDX) or a supply-chain solutions transportation company such as J.B. Hunt (NASDAQ: JBHT).

FedEx is an indicator of global economic strength, but is a company that is seeing vast bottom line improvements. The company typically grows at the rate of GDP, but after recent cost-cutting measures FedEx is expecting EPS growth between 7% and 13% for its full-year. FedEx is the quintessential play on the entire transportation sector, although the majority of its revenue comes from FedEx Express. This segment consists of domestic overnight and deferred package and freight services, as well as international express and deferred package and freight services; it is what drives the investment outlook for FedEx and what separates it from competitors. 

J.B. Hunt is more of a growth play in the transportation sector, with top-line growth of 10%. The company operates in traditional on-road trucking services, and rail, but also a non-asset based brokerage business; which is its fastest growing segment. As you'll see below, J.B. Hunt is a bit pricey, but its premium is due to its growth. Meanwhile YRC Worldwide is a value play, and FedEx is secular investment, meaning an investment decision is based on personal preference. 

Overall, the transportation sector as a whole is a sector that trades around 1.1 times sales. However, the sector is very diverse, with a wide range of industries that trade at various premiums relative to fundamentals.

<table> <thead> <tr><th> </th><th> <p><strong>FedEx</strong></p> </th><th> <p><strong>J.B. Hunt</strong></p> </th><th> <p><strong>YRC Worldwide</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Market Cap</p> </td> <td> <p>$31.5 billion</p> </td> <td> <p>$8.22 billion</p> </td> <td> <p>$240 million</p> </td> </tr> <tr> <td> <p>Revenue</p> </td> <td> <p>$44.3 billion</p> </td> <td> <p>$5.18 billion</p> </td> <td> <p>$4.82 billion</p> </td> </tr> <tr> <td> <p>Price/Sales</p> </td> <td> <p>0.70</p> </td> <td> <p>1.57</p> </td> <td> <p>0.05</p> </td> </tr> <tr> <td> <p>Operating Margin</p> </td> <td> <p>7.25%</p> </td> <td> <p>10.4%</p> </td> <td> <p>1.25%</p> </td> </tr> </tbody> </table>

Like most industries, higher margins create greater premiums to fundamentals. In the case of these three companies, all are slightly different, but it shouldn’t be difficult to see how cheap YRC Worldwide trades relative to J.B. Hunt and FedEx.

In addition, the chart above does not take into consideration YRC Worldwide’s acquisition of Arkansas Best, which would make its total revenue almost $7 billion annually. Thus, regardless of how you look at it, YRC Worldwide is very cheap, and with slight operational improvements, it could trade considerably higher.

Final Thoughts

The key with YRC Worldwide is that it’s almost profitable, with positive operating margins. If the company could make minor changes and produce a profit margin of just 1% then it would trade at just five times earnings. Even then the company’s profit margin would be far below its noted competitors above; indicating further room for improvements.

Overall, YRC Worldwide is a troubled company, but one that continues to make improvements. The company must prove that its Q1 earnings reports was not a one hit wander. It must build on these improvements and continue quarter-after-quarter.

Already, the market is rushing to re-value the stock to reflect fundamental improvements, and if they continue, then I see no reason why YRC Worldwide couldn’t be worth at least 0.50 times sales; which would still be a 50% discount to its sector. If so, then we’re talking about a stock that could have 1,000% upside from this point forward. But like I said, improvements must continue to be made, and if so, YRC Worldwide can skyrocket due to it being so cheap relative to its space.

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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