Markets react to Teamsters rejection of ABF wage deal

Wall Street traders on Tuesday (May 25) cut more than 14% off the price of Fort Smith-based Arkansas Best Corp. shares after the company’s union drivers rejected a wage and benefit reduction plan.

The International Brotherhood of Teamsters reported in late April that it and Fort Smith-based Arkansas Best Corp. reached a tentative agreement on 15% pay cuts through 2013 for the roughly 7,000 drivers affiliated with ABF Freight System — the less-than-truckload carrier owned by Arkansas Best. Teamsters officials advocated for the plan by telling the union drivers the less-than-truckload carrier was burning through about $10 million in cash reserves a month in 2010. Despite the plea by union and company officials, 56% of the union drivers rejected the plan that also included wage and benefit cuts for non-union company employees.

Arkansas Best shares (NASDAQ: ABFS) closed Tuesday at $22.26, down 14.38% from its opening price. During the past 52 weeks, the share price has ranged from a $34.56 high to a $20.14 low. The low was set early Tuesday in intraday trading before the share price partially recovered. Trading volume reached 3.56 million shares, more than 5.6 times the normal average daily volume.

“Arkansas Best is in a tough spot, in our view, because the company was prudent to build a cash war chest going into the great freight recession but now has higher relative labor costs (to YRC) and a difficult time arguing that it needs money from its employees,” David Ross, a Stifel Nicolaus trucking analyst, said in a memo.

YRC, the largest less-than-truckload carrier in the U.S., has already received wage cut concessions from the Teamsters.

Jack Waldo, a transportation sector analyst with Little Rock-based Stephens Inc., said he thinks another union vote is possible. (Stephens Inc. owns ABF shares and has or intends to seek an investment banking relationship with Arkansas Best.)

“While we were disappointed to see the Teamsters reject the 15% wage concession, we do not think it shuts the door on the possibility of a wage concession. We see the potential for ABFS and Teamster leadership to return to the drawing board and craft a less potent proposal,” Waldo explained in a memo to investors. “Typically, this process takes a few months to complete and we would not rule out the possibility of seeing another vote in late summer.”

Waldo also said the deep Tuesday decline in the company’s share price may be a good investment opportunity for those wanting to test the waters in the transportation sector.

“We view this sell-off as overdone and see an attractive risk/reward proposition for certain investors looking for higher beta investments in the space,” he explained.

A reason the investment may be wise is the possible failure of YRC. Overland Park, Kan.-based YRC avoided bankruptcy in early January 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. Stifel’s Ross said at the time that YRC “may still burn through all of its cash and borrowing capacity in the next two months, as customers are getting increasingly nervous about having their freight stranded in YRC’s network.”

Waldo seems to agree that YRC is on the edge of bankruptcy.

“We continue to see significant risk of a YRCW failure within the next 12 months,” Waldo said, adding that YRC will be especially vulnerable if Congress does not approve a nationwide pension fund change. “If this proves to be the case, we think it will be incrementally more challenging for YRCW to address its growing pension commitment and would note ABFS stands to be the #1 beneficiary of a YRCW failure with an estimated $3.00 in incremental (earnings per share).”

Waldo’s report also provides some light at the end of ABF’s dark earnings tunnel. The company has lost almost $85 million in the past five fiscal quarters. Waldo said recent gains in freight demand may see the company report positive earnings by the fourth quarter of 2010.