Analysts: ABF doing better, but lowering 2011 expectations

Two analysts who watch the financial performance of Fort Smith-based Arkansas Best Corp. say the trucking company is doing better, but have lowered their expectations for 2011 revenue and income.

Arkansas Best reported Feb. 3 a fourth-quarter net loss of $3.11 million, an improvement of the $22.1 million in the 2009 period. The fourth quarter per share loss of 12 cents missed the consensus 9 cent per share loss among 18 analysts surveyed by Thomson Financial.

ABF Freight System is the largest subsidiary of Arkansas Best, and is one of the largest less-than-truckload carriers in the U.S.

The transportation holding company, which employs about 9,500 nationwide, posted a 2010 net loss of $32.421 million, an improvement compared to a $127.522 million net loss in 2009. The 2009 income loss included a non-cash accounting charge of $64 million for the impairment of goodwill.

Total revenue in 2010 was $1.657 billion, a 12.55% gain over 2009 revenue of $1.472 billion, but still less than the $1.833 billion total revenue in 2008.

Jack Waldo, a transportation sector analyst with Little Rock-based Stephens, said the fourth quarter results did fall short of consensus, but provided proof that the company “is headed in the right direction in its quest to return to profitability.” Waldo said the Arkansas Best numbers also add proof that overall trends in the less-than-truckload industry are improving.

“Looking ahead, we expect ABFS to continue to benefit from improving trends and expect the Company to return to profitability some time in 2Q11,” Waldo noted.

However, Waldo maintains a per share price target of $25 until ABF improves its cost structure, there is consolidation in the industry or some other “catalyst” improves industry conditions. He has 2011 earnings per share at 39 cents, which is well below the consensus estimate of 57 cents.

Waldo’s “cost structure” note likely includes the company’s ability to gain wage concessions from the International Brotherhood of Teamsters.

YRC Worldwide, the largest less-than-truckload carrier in the U.S., received three rounds of wage and benefit concessions from the Teamsters, with the most recent announced Nov. 1 that includes up to $350 million annually through 2013. Previously, the Teamsters voted to approve a 15% pay cut among unionized YRC drivers. ABF has been unable to receive similar concessions from the union.

On Nov. 1, Arkansas Best Corp. filed a lawsuit seeking up to $750 million in financial damages from alleged violations of a National Master Freight Agreement (NMFA) by the International Brotherhood of Teamsters and others.

On Dec. 16, U.S. District Court Judge Susan Webber Wright (Eastern District of Arkansas) dismissed the suit for lack of subject matter jurisdiction. The company announced Jan. 19 it is appealing the dismissal.

On the positive side, Waldo said he believes ABF is gaining market share over competitors and praised the company on improving its operating ratio and margins.

“In summary, we were relatively impressed with ABFS’ 4Q10 results, and think management has done an exceptional job leading the Company out of the worst freight recession of recent memory,” Waldo wrote. “And these results are even more impressive in our eyes, considering ABFS spent the better part of the year trying to address the unfair treatment of its Company and employees relative to the stipulations of their union agreement (in our opinion).”

Jeff Kauffman, an analyst with Sterne Agee, said in his Feb. 4 note to investors the company did well generating revenue, but high operating costs created the quarterly loss. He said ABF’s strategy to push growth at all levels is temporarily a good move.

“We believe that the company’s strategy to accelerate growth in an effort to lower unit costs makes sense at this point in time. Very few companies in the LTL industry in the long run make hay by absorbing lower yielding product. We believe this strategy has a couple of more quarters until it begins to run into a wall,” Kauffman noted.

However, Kauffman is considerably more optimistic about the company’s 2011 earnings. Despite lowering his 2011 earnings per share outlook by 5 cents, Kauffman targets a per share earnings in 2011 of 95 cents. He also said conditions indicate a share price target of $33.

Like Waldo, Kauffman also commented on the company’s conflict with the Teamsters.

“At the end of the day, ABFS must contend with its higher-than-peer labor expenses,” Kauffman advised.