Arkansas Best gains require union wage cuts, pension reform

The good news is that the most recent analyst report says Fort Smith-based Arkansas Best Corp. may have hit bottom and could see positive earnings in fiscal 2011. But even with that, the economic future of Arkansas Best depends largely on the company’s success in gaining wage and pension relief from Teamsters and Congress, respectively.

Arkansas Best is the parent company of ABF Freight System, a less-than-truckload carrier that is the second-largest in an estimated $29 billion LTL market in the U.S. The company employs about 9,500 nationwide, which includes about 7,000 unionized drivers.

The company posted a 2009 net income loss of $127.52 million, compared to a $29.168 million gain in 2008. (The 2009 income loss includes a non-cash accounting charge of $64 million for the impairment of goodwill.) Total revenue in 2009 was $1.472 billion, a 19.6% dip from 2008 revenue of $1.833 billion. In the second quarter of 2010, the company posted a net income loss of $7.4 million, an improvement compared to a $15.4 million loss in the 2009 period. Also, total revenue during the quarter was $411.3 million, up 13.4% compared to the same quarter of 2009.

Second-quarter tonnage increased 14% compared to the first quarter — one of the first big gains for a company that has struggled through a “freight recession” that began in late 2006.

David Ross, a trucking sector analyst with Stifel Nicolaus, issued Sept. 7 a stock upgrade — from “Hold” to “Buy” — for Arkansas Best (NASDAQ: ABFS), saying the upside potential is greater than the downside risk. He believes the company will miss earnings expectations in the third and fourth quarters of 2010, but counters that with “three potential positive catalysts” that could happen within the next 12 months.

CATALYSTS
• Teamsters (wage cuts)
For starters, Ross says ABF could gain wage concessions from Teamster drivers that would put it on a level-playing field with other unionized LTL operators. Overland Park, Kan.-based YRC, the largest LTL operator, was granted a wage deal with the Teamsters, but a similar wage deal for ABF was rejected by 56% of the union drivers in a May 24 vote. The vote failed even after Teamsters officials advocated for the plan by telling union drivers that ABF was burning through about $10 million in cash reserves a month in 2010. Arkansas Best also cut about $18 million in non-union wages and benefits before asking the union drivers for relief.

“We believe Teamsters have caused problems for ABF the past couple of years by allowing YRC to alter the same labor contract signed by ABF without allowing ABF to benefit from the same changes,” Ross noted in his report. “The non-union competitors are free to adjust wages and benefits as needed, so ABF has been the only LTL carrier that has increased wages/benefits each year through the great freight recession, which began in 3Q06.”

Ross also reported that Arkansas Best management believes YRC has a $10 per hour cost advantage on wages/benefits because of its approved wage deal with the Teamsters.

Arkansas Best nor the Teamsters would comment on negotiations for a second vote.

• Pension reform
The other catalyst is the potential for pension reform legislation pending in Congress that would reduce pension burdens for Arkansas Best and other companies. As it now stands, Arkansas Best and other LTL pay into an “orphan” fund to pay the pensions of employees who worked for trucking companies now out of business.

“We currently have to pay for the benefits of persons who never worked for our company (because their former employers are out of business and are no longer making pension contributions on their behalf.),” noted an e-mail comment from David Humphrey, vice president-investor relations and corporate communications for Arkansas Best. “We want to work out a permanent solution to our union pension situation.”

Jon Langenfeld, an analyst with Baird, noted in a July 21 report that Arkansas Best’s estimated liability in the Central States Pension Fund is around $1.2 billion. And that’s just one fund to which Arkansas Best has to help fund.

“ABFS’ profitability headwinds continue with uncertainty surrounding timing of industry pricing recovery and pension legislative relief. Both pension relief and industry pricing could drive meaningfully better earnings. Without these events, core earnings power for ABFS remains muted given excess industry capacity,” Langenfeld noted.

• YRC bankruptcy
The third positive catalyst noted by Ross is the continued chance of a YRC bankruptcy. YRC avoided bankruptcy in early 2010 through a complex bond swap agreement with creditors. The deal essentially reduced the company’s debt by about $500 million and provided short-term support for working capital. YRC had piled up a mountain of debt with the $1.07 billion acquisition of Roadway Corp. in 2003 and the $1.23 billion acquisition of USF Corp. in 2005.

Langenfeld, who does not believe a YRC bankruptcy is imminent, said the following about the market if YRC were to go down: “Ultimately, a potential YRCW bankruptcy would be the single largest positive catalyst for the industry given the resulting upward repricing of freight. Further, ABFS (the second-largest national LTL carrier and only remaining unionized LTL carrier of scale) would stand to benefit from market share gains in the event of a YRCW exit.”

FUTURE PROSPECTS
Ross predicts a 40% chance of a 10% Teamsters wage cut, and a 50% chance of pension reform. Based on those odds, Ross bumped the ABFS 12-month price target to $30. He doesn’t stop there. If Arkansas Best gets “significant pricing, volume, and wage/pension relief and is able to return to peak margins of last cycle,” he says the company could post earnings per share of up to $3.90 with the stock trading as high as $48 per share “in the next couple of years.”

Arkansas Best shares closed Tuesday (Sept. 14) at $23.37, up 2 cents. During the past 52 weeks, the share price has ranged from a $34.56 high to an $18.84 low.

Langenfeld, who maintains a “Hold” rating on ABFS, has a $23 price target on the shares.

Deutsche Bank analyst Justin Yagerman maintains a “Hold” rating on ABFS, but has lowered raised the 2011 earnings per share estimate from $1.22 to $1.26. Yagerman also notes the potential benefit of a Teamsters wage concession, but adds a concern about a double-dip recession.

“Upside risks include wage and/or benefit concessions from the Teamsters, better-than-expected tonnage growth, and multiemployer pension relief. Downside risks include worse-than-expected LTL pricing, higher-than-average cost structure, and a double dip,” Yagerman noted.

For their part, Arkansas Best officials say they are focused on managing the variables with which they have the most control. The primary variable, obviously, is wage and pension costs.

“We continue to have the highest cost structure in the LTL industry, even higher than our Teamster competitor YRC. We signed the same labor agreement as YRC so we believe we should have the same deal that they currently have with the Teamsters,” Humphrey said. “We continue to be focused on addressing ABF’s cost structure. There are numerous factors that impact our ability to achieve a solution that is acceptable to all parties. We’ll share an update at the appropriate time.”