Should You Invest in These Struggling Truckers?

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

The trucking industry has been running in a higher gear lately, as domestic economic growth has led to higher shipments of a variety of products, including auto components and general retail goods.  The big winners have been the less-than-truckload companies, like Old Dominion Freight Line (NASDAQ: ODFL), which efficiently carry items for multiple customers over relatively short distances, typically 500 to 1,000 miles.  While long haul truckers haven’t seen similar shipment volume gains, investors are betting on better times and profits ahead for major players in the segment, with big stock price gains for YRC Worldwide (NASDAQ: YRCW) and Arkansas Best (NASDAQ: ABFS) in 2013.  So, what’s happening here?

Getting costs in line

Both YRC Worldwide and Arkansas Best have been rallying for similar reasons, namely a reduction in costs for their mostly unionized workforces.  In a world of deregulated prices and major non-union shops like Old Dominion, YRC Worldwide and Arkansas Best have found profits hard to come by, leading to an inability to reinvest in their fleets and facilities.  Fortunately, the powerful Teamsters union has finally woken to the new reality, agreeing to some work rule changes and lower compensation rates.

In its latest fiscal year, YRC Worldwide seemed to turn the corner, reporting its first annual operating profit for some time.  Despite flat overall shipment volume growth, the company’s operating margin benefited from a small improvement in pricing and lower worker compensation costs from its safety initiatives.  In addition, the company’s operating ratio efficiency reached a five-year high due to its elimination of non-core units like its logistics and regional truckload segments.

However, everything isn’t rosy at YRC Worldwide as its weak operating cash flow isn’t providing the funding for its required capital expenditures.  More importantly, the company has significant debt, roughly $1.4 billion as of December 2012, and its interest charges consume a sizable chunk of its operating cash.  The company’s best bet is probably a combination with an industry competitor and likely led management to propose a merger with competitor Arkansas Best in early May 2013.

Meanwhile, Arkansas Best’s management rejected YRC Worldwide’s combination idea, choosing instead to focus on its own operational issues.  While Arkansas Best doesn’t have the debt issues that YRC Worldwide has, it is similarly trying to find a way to make money in its core freight shipping business, which reported an operating loss in 2012.  Fortunately, it took a big step toward that goal with the ratification of a new collective bargaining agreement with the Teamsters Union in June 2013, which lowers compensation costs roughly 7% and should create more flexibility in work rules.

Management has also been diversifying into complementary businesses through the acquisition channel, including the June 2012 of Panther Expedited, a major global provider of logistics services.  The company’s non-core businesses have become a sizable component of its overall sales, accounting for 18% in 2012, though they have yet to generate meaningful bottom-line results.  However, the complementary business lines, like logistics and freight brokerage, hold the ability for good cross-selling opportunities and could lead to higher profitability for Arkansas Best’s core trucking business.

A better way to go

While investors could take a flyer on these evolving trucker stories, a better bet is to stick with best of breed in a capital intensive business like trucking, which means Old Dominion Freight Line.  The company is almost exclusively focused on the less-than-truckload segment, which allows it to transport goods for multiple customers on its trucks and economize on fuel costs.  It also benefits from barriers to entry in the segment due to the need to have a vast network of service centers and distribution facilities to manage the diverse shipments.

In its latest fiscal year, Old Dominion reported solid financial results once again, with increases in revenues and operating income of 12.1% and 21.9%, respectively, versus the prior year.  Like the rest of the industry, Old Dominion benefited from a better pricing environment, as well as a 7% increase in overall shipment volume.  More importantly, the company’s operating profit and cash flow hit record highs, providing the required capital to reinvest heavily in an expansion of its fleet and network.

The bottom line

Investors have bid up shares of YRC Worldwide and Arkansas Best and expect them to deliver higher profits in the future.  However, they remain at a disadvantage to more nimble competitors that don’t have legacy pension obligations and work rules.  Until these companies show sustainable profit gains, investors should stick with a long-term winner, Old Dominion.

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Robert Hanley owns shares of Old Dominion Freight Line. The Motley Fool has no position in any of the stocks mentioned. 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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