Arkansas Best income may fall on contract delay

Fort Smith-based Arkansas Best Corp. is likely to end 2013 in positive income territory, but a delay in implementation of a new labor contract has caused several analysts who cover the transportation holding company to lower the earnings estimates.

Arkansas Best, the parent company of ABF Freight System, one of the largest less-than-truckload carriers in the U.S., announced Friday (Aug. 9) that second quarter net income was $4.878 million. The market was expecting more, but investors liked the report, with Arkansas Best shares (NASDAQ: ABFS) gaining $3.19 to close the day at $22.90.

A 2013 in positive territory will avoid two consecutive years of losses for the company. In 2012, the company posted a $7.7 million loss, a wide swing from the $6.159 million gain in 2011.

Also, ending on a positive note means the company will have to perform well in the back half of the year. For the first six months of 2013, the company has a loss of $8.517 million.

Analysts watching the company had based previous earnings estimates on the company’s new contract with the International Brotherhood of Teamsters being implemented earlier in the year. A five-year contract was approved on June 27, but some supplemental provisions were rejected. Officials with Arkansas Best and the Teamsters negotiated the rejected provisions, and the Teamsters announced Aug. 6 that ballots had been mailed to seven “local/area supplements” for approval. The ballot deadline is Aug. 28.

The contract, once fully ratified, will cover about 7,500 ABF employees who are members of the union. The contract includes an immediate 7% wage reduction that is recovered by the fifth year of the contract. The company was also able to negotiate for flexibility in work schedules and work across job classifications. Most of those workers are drivers.

“Once this important process is concluded, it will represent a pivotal moment for Arkansas Best, as we will be able to turn our undivided attention to driving improved profitability at ABF, while continuing the expansion and growth of our emerging businesses,” Arkansas Best President and CEO said in the earnings report. “As our customers look to us for total solutions to their complex supply chain needs, we are now better positioned than at any time in our history to fulfill those requirements.”

Brad Delco, a transportation industry analyst with Little Rock-based Stephens Inc., initially said benefits from the new contract would result in 2013 net earnings of 60 cents per share, or near $16.25 million. However, because the benefits of the new contract are not likely to begin until later in the third quarter, Delco lowered the estimate to 30 cents per share in a Friday note to investors.

For the same reason, Wells Fargo lowered its 2013 per share estimate for Arkansas Best to 43 cents from 67 cents.

It’s no small shift. For example, Delco’s lowered estimate shaves more than $8 million from the Arkansas Best bottom line. The lowered estimate by Wells Fargo reflects a reduction of almost $6.5 million from 2013 net income for Arkansas Best.

Delco and Wells Fargo are on the optimistic side of the group of analysts who watch Arkansas Best. The consensus of analysts’ estimates is that the company will post total revenue in 2013 of $2.25 billion, and will post net income of 23 cents per share, or about $6.2 million. Per share income is estimated by the consensus to reach $1.35 in 2014, on potential total revenue of $2.37 billion.

Delco targets a 3.3% increase in tonnage hauled in fiscal year 2013, which he estimates will boost total trucking revenue to $1.761 billion, up $45.5 million compared to 2013. According to Delco, the gains should improve in fiscal 2014. Trucking revenue should reach $1.894 billion, with tonnage up 3%. Operating income in 2014 could reach $62.2 million, compared to the $21.1 million in the 2013 estimate, Delco estimates.

In the second quarter 2013 Stephens LTL rate index released Monday (Aug. 12), Delco and research associate Ben Hearnsberger reported the index was up 2.8% in the quarter compared to the second quarter of 2012. The index is based on revenue per hundredweight carried (sans fuels charges). A good sign for Arkansas Best and other LTL carriers is that the second quarter index growth was the second highest year-over-year gain since 2005.

“Going forward, we would expect to see similar growth with the full year coming in around +3%,” noted the LTL index report.

In his note to investors on Arkansas Best, Delco also hints that the company may further cut costs by closing terminals.

“As soon as these agreements are ratified ABFS will begin to recognize the cost savings included in the new agreement. Beyond this, we think ABFS addresses its industry low tonnage/terminal and tonnage/door issues by rationalizing its network,” Delco said. “Management noted in the press release that ‘further details on expected future cost savings’ will be provided after the supplemental agreements are signed.

Delco suggests that each closed terminal could save the company just short of $1 million. A complete “rationalizing” of the network could ultimately generate up to $32.5 million in annual savings, Delco wrote.