A ratified labor deal could boost ABF stock price

by The City Wire staff (info@thecitywire.com) 21 views 

A recently announced labor contract between ABF Freight System and the Teamsters could improve the trucking company’s bottom line as early as the third quarter if it is ratified by union members, according to a research note from Stephens Inc.

ABF Freight System and the Teamsters announced May 3) they had reached a tentative agreement on a five-year labor contract. Neither side would release details on the agreement.

The next step will include the Teamsters and company officials educating union members about the terms of the contract. The contract will eventually face a vote of qualified union members.

The existing labor contract between ABF and the International Brotherhood of Teamsters was initially set to expire March 31 for the about 7,500 Arkansas Best employees represented by the Teamsters.

Officials with ABF, the largest subsidiary of Fort Smith-based Arkansas Best Corp., have said wage and benefit concessions are needed to allow the company to be more competitive. YRCW, the biggest competitor to ABF, has received wage concessions to help it avoid bankruptcy.

Arkansas Best has been unable to post two consecutive years of income gains since 2008. The company reported April 30 a first quarter loss of $13.4 million.The loss of 52 cents per share was higher than the consensus analyst estimate of a loss of 41 cent per share.

The company posted a loss of $7.7 million loss in 2012. Net income for 2011 reached $6.159 million, a huge swing from the $32.693 million loss during 2010. The company posted a net income loss of $127.522 million loss in 2009, with $64 million representing an accounting charge. The company posted net income of $29.168 million in 2008.

Although details of the agreement are unknown, Stephens Analyst Brad Delco believes the new contract most likely provides some level of cost relief for ABF. Delco, in his note released Monday (May 6), moved the share price (NASDAQ: ABFS) from a $12 target to $18.

Indeed, the share price closed Monday at $14.73, up almost 40%, and pushing just a few cents away from a 52-week high of $14.83.

“While no details regarding terms were released (to come in weeks ahead), we believe any relief on wages, benefits, and work rule flexibility could go a long way to helping its cost structure better align with industry peers,” Delco wrote. “Assuming the tentative agreement gets ratified by local unions, we believe the benefits could come as early as 3Q'13, but more importantly over the long term as ABFS' cost structure could allow it to become more competitive in new lanes and provide future growth opportunities.”

Delco, along with research associate Ben Hearnsberger, believes the ABF salaries, wages and benefit structure is 12%-15% higher than its non-union competitors and up to 15% higher than YRCW. The Teamsters were given equity in the company in return for lowering wages and benefits.

“To be fair, YRCW did give up equity to garner these savings, which is why we think it is prudent to suggest that ABFS likely did not receive similar relief,” Delco wrote. “However, even if we were to haircut the potential benefits by 50%, this suggests a net benefit of ~$2.00 in annual EPS to ABFS, assuming no equity dilution and/or performance plan with its employees. Keep in mind this does not take into account any savings from more flexible work rules or other health / welfare savings.”

Continuing, Delco summarized: “The net takeaway here is that even if ABFS could make up half of the disparity this could mean an incremental $3.00 in EPS power on an annual basis beginning as early as 3Q’13. As a result, we think the stock should begin to see significant momentum, particularly as the details of the agreement come to light and ABFS is able to implement changes to its network.”

(Little Rock-based Stephens Inc. owns ABFS shares, and has and expects to provide investment banking services to Arkansas Best Corp.)