In Trucking, Yellow Is Flashing Green
By James Corridore
Less-than-truckload (LTL) freight carriers -- those that haul loads of 10,000 pounds or less -- should benefit as the U.S. economic recovery starts to accelerate. At Standard & Poor's, we believe that the best stock to play this trend is Yellow Corp. (YELL ), the largest LTL company in the U.S. Yellow is a well-positioned competitor in an attractive industry sector that's poised to increase earnings nicely in 2003. Yellow carries S&P's highest investment ranking of 5 STARS (buy).
Year-to-date through Sept. 27, the S&P trucking index has solidly outperformed the overall market, rising 2.9%, while the S&P 500-stock index declined 27.9% over the same period. We believe this reflects investors moving into trucking stocks in advance of an actual economic recovery, in line with historic trends for this highly cyclical industry. It's also a sign of expected improvement in revenues, margins, and earnings at many major truckers (See BW Online, 10/2/02, "Potent Fuel for Trucking Stocks").
Results for the overall trucking industry are closely correlated to how the overall U.S. economy does, and trucking is one of the first categories to recover once an economic recovery gets rolling. For this reason, S&P expects the LTL trucking industry to see a strong revenue and earnings recovery in 2003, as U.S. economic strength slowly builds.
$2 BILLION UP FOR GRABS.
In addition, the recent bankruptcy and dissolution of Consolidated Freightways, the third-largest LTL trucker in the U.S., has created a unique opportunity for the major LTL carriers to boost revenues and gain market share. The absence of ConFreight creates a $2 billion revenue opportunity that the largest LTL companies should be able to capture.
As the economy rebounds, LTL truckers will see more demand for their services, as retail stores restock shelves, manufacturing output increases, and consumer demand strengthens. These trends will drive increases in total ton-miles and revenue-per-ton-mile, two important LTL statistics. At the same time, reduced industry capacity due to the failure of ConFreight and capacity cuts by other major truckers, should allow the LTL carriers to push through solid rate increases.
As America's largest LTL outfit, Yellow should benefit from both the economy's expected improvement and the incremental revenue that capturing some of ConFreight's customers would bring. Yellow, through its Yellow Freight System subsidiary, has long-haul LTL operations in all 50 states, Canada, and Mexico.
In September, 2002, Yellow spun off its SCS Transportation subsidiary, comprising Saia Motor Freight and Jevic Transportation, two regional LTL companies, that had been poor performers. This will have a positive effect on Yellow's margins, as its long-haul operations are more efficient and carry higher operating margins than the regional businesses.
S&P expects Yellow's revenues from continuing operations in 2003 to rise about 10%, on top a 7% increase expected for 2002, with growth coming from new customers and stronger shipping volumes. Margins should benefit from better asset utilization, the absence of SCS Transportation, and reduced salaries as a percentage of revenues, offsetting likely rises in fuel and insurance costs. We see earnings per share of $2.80 in 2003, which would represent growth of 81% from our 2002 target of $1.55.
Yellow's shares were recently trading at 10 times our 2003 EPS estimate, a discount to the company's peer group average of about 13. The stock is also trading at a discount to its peers based on two other important measures, price-to-sales and price-to-EBITDA (earnings before interest, taxes, depreciation, and amortization). In addition, our discounted cash-flow model indicates the shares are trading substantially below fair value.
S&P's price target for Yellow is $36, which was derived by applying our 2003 EPS estimate of $2.80 to the average p-e of 13 for the trucking companies we follow. The price target doesn't take into account possible rising p-e multiples for the entire trucking group as investors continue to rotate into trucking stocks.
Our price target implies the potential for 30% capital appreciation over the next 9 to 12 months, which means we expect the stock to substantially outperform the overall market over the same period.
Analyst Corridore follows trucking stocks for Standard & Poor's