New labor contract likely to boost ABF share price

by The City Wire staff ([email protected]) 118 views 

Shares of Fort Smith-based Arkansas Best Corp. rose almost 15% Friday (June 28), with one transportation industry analyst predicting the share price will continue to rise now that the company appears to have a five-year labor contract in place with the Teamsters.

The International Brotherhood of Teamsters announced June 27 that a new contract was approved, but some supplemental provisions were rejected. Officials with Arkansas Best, the parent company of less-than-truckload carrier ABF Freight System, and the Teamsters will have to negotiate the rejected provisions before terms of the new contract begin. The contract will cover about 7,500 ABF employees who are members of the union. Most of those workers are drivers.

Brad Delco, an analyst with Stephens Inc., believes the new contract will be good for the bottom line of ABF Freight. He reiterated his “overweight” rate of Arkansas Best shares (NASDAQ: ABFS) and raised the trade target from $18 per share to $30 per share.

“We reiterate our OW rating and are raising our target to $30 (was $18) following the Teamster's ratification of the proposed national labor contract. While 6 of 25 supplemental agreements will need to renegotiated, these are very minor in terms of the economic impact to ABFS,” Delco noted in the June 28 investor note. “The "hard-dollar" terms were agreed upon and we believe these provide ABFS a more competitive cost structure vs. its peers and provide an opportunity to see meaningful improvements in profitability going forward.”

The shares are heading to $30. On Friday, the share price closed at $22.95, up $2.96, or 14.81%. During the past 52 weeks, the share price has ranged from a $23.45 high to a $6.43 low. The shares have spent almost 18 months trading below $20, with much of that time seeing the price below $15.

BENEFICIAL TERMS
The contract includes an immediate 7% wage reduction that is recovered by the fifth year of the contract. The wage reduction schedule provides for a 7% cut beginning in the pay period following contract ratification. But beginning July 1, 2014, wages are increased 2%. Wages again increase 2% on July 1, 2015, up 2% on July 1, 2016, and up 2.5% on July 1, 2017.

The company was also able to negotiate for flexibility in work schedules and work across job classifications. Union officials also granted the company flexibility to use non-union, outside carriers to move quickly to capture new business or to reduce the number of “empty miles.”

With help from the lower expenses, more flexible work rules and other contract changes, Delco is estimating Arkansas Best will post fiscal year 2013 operating income of $15.3 million, an almost $30 million swing from the $14.4 million operating income loss in fiscal year 2012.

To the bottom line, Delco estimates fiscal 2013 earnings per share of 60 cents, and rising to $2 in fiscal 2014.

“With the labor agreement almost fully in place, we believe ABFS is now close to being in a position to address some network density issues, which could lead to a series of
catalysts for the stock over the next year,” Delco wrote.

NETWORK ‘RATIONALIZATION’
Part of those savings come could in the form of ABF terminal closures, according to Delco. He notes that Old Dominion Freight Lines, for example, has 219 terminals and serves a larger geographical area than ABF with its 277 terminals. Delco said the contract cold provide the “opportunity to rationalize ABFS’ network” during the next 12-18 months. Each closed terminal could contribute up to $1 million in savings, Delco estimates.

The savings and estimates of a return to positive operating income would be a welcome change for Arkansas Best management and shareholders.

The company reported on April 30 a first quarter 2013 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. Revenue during the quarter was $520.7 million, well ahead of the $440.9 million during the same quarter in 2012.

The quarter followed a 2012 that saw the Fort Smith-based transportation holding company post a $7.7 million loss, a wide swing from the $6.159 million gain in 2011. Arkansas Best has been unable to post two consecutive years of income gains since 2008.