American Freightways struggles on Wall Street

Investors spurn trucking company stocks amid concerns over slowing economy

Stock in American Freightways Corp. of Harrison has lost more than 60 percent of its value since the first of the year, plummeting from about $20 a share in October to about $8 a share late last week.

Company officials say investors overreacted to the company’s dismal fourth-quarter earnings last year. Analysts say the company is the victim of a nervous Wall Street.

“Investors believe we are at the end of the current economic cycle,” says Tim Quillin, an analyst with Stephens Inc. of Little Rock.

“The economy is slowing down,” says Doug Rockel, an analyst with Furman-Selz LLC of New York. “Things are going to get worse.”

Trucking companies are among the first segments of business to be affected by a slowing in economic activity. When the demand for consumer products drops, the demand for trucks to transport those goods drops, too.

Overall, the value of trucking company stocks is down 10 percent compared to the market index and declines in July were among the largest ever recorded. Companies that specialize in less-than-truckload shipments, such as American Freightways, have seen the largest declines.

Less-than-truckload trucking companies are more sensitive to subtle changes in economic conditions than other companies because of the industry’s dependency on healthy domestic production and retail sales to generate freight. The stock performance of the LTL trucking companies is often interpreted as a barometer of investor confidence.

“I am worried,” Rockel says. “The investors have seen something they didn’t like.”

That something was earnings far lower than most had expected at the end of last year. When Freightways announced last December that its fourth-quarter earnings per share would be 5 cents, the price of its stock dropped $4.50 in a day. Analysts had expected the company to generate earnings of about 19 cents a share.

“We stumped our foot and, in my opinion, the market overreacted,” says Frank Conner, the company’s CFO.

Conner says the low earnings were the result of unexpected costs involving the company’s expansion into Michigan, increased costs of implementing a new training program and an attempt to reconfigure the company’s hauling routes.

“They compounded each other,” he says.

The company remains sound, he says. It has improved its earnings in the first two quarters of this year. In the first quarter, the company doubled its earnings to 10 cents a share. In the last quarter, its earnings were up to 24 cents a share. Reconfiguring the hauling routes has been delayed until next year.

“I admire them as a company,” Rockel says. “They have been awesome.”

However, the company has some “interesting dilemmas” to resolve, he says. The company’s labor costs are too high. Freightways pays its employees above-average wages as protection against unionization. The company’s fixed costs, such as the expense of operating its terminals and distribution centers, are also too high, he says.

Despite the challenges, Rockel agrees that investors overreacted to the company’s fourth-quarter earnings.

“[The company] has been punished,” he says. “They are still hurting from it.”

Rockel recommends the stock to his clients and says the company is capable of producing twice the earnings of the second quarter.

“We’ll take a bet on them,” he says. “They are historically a very good company.”

Quillin agrees. He says the company will recover from the current decline in value. Quillin maintains an “outperform” rating on the company, a designation based on expectations that the value of the stock will increase by at least 10 percent during the next year. A “buy” recommendation is assigned to stocks expected to increase between 10 percent and 20 percent in value.

“I don’t foresee the stock going up soon, but it shouldn’t go much lower,” he says.

The declines follow one of the best years the trucking industry has ever had. In 1997, everything seemed to be going right for the trucking companies. Fuel prices were down and freight was plentiful. The United Parcel Service strike in August also boosted trucking company profits as customers found alternative methods of shipping goods. Then, there was the gridlock on the nation’s railroads that sent more freight to the trucking companies.

“It was an awesome year,” Rockel says. “It was like the stars lined up.”

Trucking companies began ordering more trucks, at times more than the manufacturers could build. Now, as the economy slows, the companies again face the serious risk of overcapacity, more trucks than freight to fill them.

The next five months will be critical for the trucking companies, Rockel says. The devaluation of the Asian market will have a direct impact on them.

As the Asian economy declines, goods from Asia become cheaper for American consumers to buy. The country already is seeing the effect of that, Rockel says. The seaports on the West Coast are processing record levels of imported goods.

As the demand for domestic products decreases, the demand for trucks to haul those products decreases. Domestic production employs trucks in all aspects, from hauling the raw materials to factories to carrying the finished products to stores. Much of the transportation of imported goods is done by railroad, Rockel says.

“As a truck guy, I like to see locals buy local,” Rockel says. “It has a chain reaction effect. As time progresses, it will get worse.”

Investors are anticipating these factors when they decide to sell trucking company stock.

“What you’ve seen is the first of a one-two punch,” he says. “You’ve seen the stock prices fall on speculation. Wait until you see the confirmation.”

The confirmation is the remaining two quarterly earnings reports for this year. Rockel expects them to remain dismal.

Neither Rockel nor Quillin is worried about the apparently impending change of command at the company. Sheridan Garrison, the company’s founder and CEO, seems to be positioning the company for new management. On July 1, Tom Garrison, one of Garrison’s sons, became president and COO while his other son, Will, was named corporate vice president and secretary/treasurer of the company.

“Hopefully, the second generation can do it as well as the first,” Rockel says.