ABF faces ‘messy’ road to profitability in 2011

One of the bigger stories this week in the national trucking industry centered on the surprising poor first quarter earnings report released Monday (April 25) by Fort Smith-based Arkansas Best Corp.

The lackluster performance, however, may just be a “one-off,” according to Jack Waldo, a transportation industry analyst with Little Rock-based Stephens Inc. He has not pulled back from his forecast that the company will return to profitability in 2011 after 10 consecutive quarters of income losses.

The company, whose primary business is ABF Freight System, posted a first-quarter 2011 net loss of $12.8 million. The loss was an improvement over the $21.4 million loss in the first quarter of 2010, but the per share loss of 51 cents was well below the 21 cents per share loss from an average of analyst estimates.

Company shares (NASDAQ: ABFS) fell $2.02, or almost 8% the day of the earnings announcement. The shares, which ended Friday at $25.36, closed Wednesday at $22.72. During the past 52 weeks, the share price has ranged from a $33.52 high to an$18.84 low.

MESSY ENVIRONMENT
Waldo said the first-quarter results were “very unABFS-like,” but added that the price decline is “overdone.”

“(We) think that the strong April trends exhibited thus far support the notion that LTL (less-than-truckload) fundamentals are improving and ABFS can still achieve its (year-over-year) margin improvement goals and deliver a profitable quarter during FY11,” Waldo noted.

That profitability won’t come easy.

Financial writer and investor Stephen Simpson noted in a recent Investopedia report that fuel prices are a problem in what he noted as a “messy operating environment.” Part of that mess includes not being able to obtain wage concessions the Teamsters gave to ABF competitor YRC Worldwide.

“While Arkansas Best has a fuel surcharge mechanism in place, it is apparently not working as well as it should. What’s more, higher fuel prices often push freight toward the rails and towards intermodal carriers like J.B. Hunt; that’s not necessary such a strong factor in less-than-truckload shipping, but every bit counts,” Simpson wrote.

REASONS FOR OPTIMISM
Waldo’s optimism includes several possible growth catalysts for ABF.

“Furthermore, we see several potential catalysts on the horizon including 1) improving LTL fundamentals, 2) potential industry consolidation, and 3) a potentially favorable outcome in its recent appeal of its $700 mil. lawsuit against the Teamsters and YRCW. If any of the aforementioned catalysts were to come to fruition, it could have a materially favorable impact on ABFS’ earnings profile and stock price,” Waldo wrote in his investor note.

While noting he is not a legal expert, Waldo does see a “viable possibility” that ABF is allowed by the U.S. Court of Appeals (St. Louis) to pursue its legal action against the Teamsters and YRC.

“If this were to happen, in our minds, it would dramatically improve ABFS’ chances to recapture some of the financial loss that it has experienced and/or is expected to experience from the financial concessions YRCW employees have given to YRCW over the last several years,” Waldo wrote.

Waldo’s note also included the following thoughts on ABF.
• Based on management commentary and April operating statistics, it appears that many of the issues that hampered 1Q11 pricing have been addressed, and we expect noticeable improvement starting with 2Q11.

• We would note that ABFS’ volume growth continues at historically high rates and that there is concrete evidence that something meaningful is percolating in the LTL pricing environment.

• Furthermore, our recent industry studies suggest that a material amount of capacity has left the LTL industry over the last year (we estimate roughly 6%). In our opinion, this sets the foundation for a sustainable longer-term recovery in the LTL space, especially considering that all the major LTL players seem to finally be acting rational in terms of their pricing philosophies.

NATIONAL INDUSTRY REPORT
Bob Costello, vice president and chief economist for the American Trucking Associations, is also optimistic about the emerging recovery of a trucking sector that entered a downturn in fall 2006.

The ATA report Tuesday (April 26) that its seasonally adjusted Truck Tonnage Index rose 1.7% in March after falling 2.7% in February. Compared with March 2010, the index tonnage was up 6.3%, which was higher than February’s 4.4% year-over-year gain, but below the 7.6% jump in January.  For the first quarter of 2011, tonnage increased 3.8% from the previous quarter and 6.1% from the first quarter 2010.

“Despite my concern that higher energy costs are going to begin cutting into consumer spending, tonnage levels were pretty good in March and the first quarter of the year,” Costello said in a statement. “While I still think the industry will continue to grow and recover from the weak freight environment we’ve seen in recent years, the rapid spike in fuel prices will slow that growth.”

According to the ATA, trucking serves as a barometer of the U.S. economy, representing nearly 68% of tonnage carried in 2008 by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 8.8 billion tons of freight in 2009. Motor carriers collected $544.4 billion, or 81.9% of total revenue earned by all transport modes.