Arkansas Best Corporation
Arkansas Best Corporation (ABFS-$27.45-Peer Perform)
Signs of Hope Drive Stock
IN-LINE REPORT. ABFS reported 4Q EPS generally in-line with expectations (4% below Cons. but well above our low end expectation and with some puts & takes) Rev, EBIT and EPS changed y-o-y by +2%, -5% and -4%, a big acceleration on much easier comps from -5%,-40% and -45% in 3Q. We roughly estimate that ABFS benefited by $0.09 y-o-y from higher fuel rev. net of costs.
TONNAGE LESS WORSE THAN EXPECTED. ABFS reported daily tonnage declines less worse (-1.5%) than exp. in 4Q into easier comps and improved traction with its RPM rollout. Importantly Mgmt noted Dec and Jan tonnage were modestly + y-o-y. Mgmt will not break out how much of this tonnage improvement is related to the increasing traction in the roll out of their next day product, but we suspect most, if not all of it.
REPORTED YIELDS ALSO BETTER THAN EXPECTED. ABFS reported yields up 2.5% y-o-y compared to -0.2% in 3Q. Our rough estimate is that about 3.5pp-4pp of this is related to fuel surcharges which are up 42% over a yr ago and that actual pricing remains down. This would explain the in-line report despite better than exp. reported tonnage, yields, gains on sales & tax rate.
SO, WHY WAS THE STOCK UP 17%? We suspect a combination of short covering into the report, 2 of our competitors defensive upgrades in the morning, as well as the recent rush to own early cyclicals into the news that tonnage had likely bottomed into easier comps. Also we suspect some investors may misinterpret reported yields and arguably temporary benefits from the fuel surcharge, with real pricing improvement.
WHAT TO DO WITH THE STOCK? The truck stocks are en fuego into the Fed's recent more aggressive stance and signs that 4Q reports were not a total disaster. We noted when we upgraded the sector two weeks ago that we expected the stocks to be very volatile and present many trading opportunities up and down during 2008. Our sense is the group, including ABFS has likely gotten ahead of itself in the near term.
INVESTMENT CONCLUSION: ABFS was up 17% on Friday (compared to -1.6% for the S&P 500 and 2.6% for our LTL Index ex-ABFS) after reporting an in-line 4Q, but noting that tonnage trends had improved in December and January.
We have raised our estimates for C08 and C09 from $2.20 and $2.20 to $2.32 and $2.42 (compared to prior Cons of $2.33 and $2.59), respectively. ABFS is currently trading at 11.8x and 3.3x our upwardly revised forward year rolling EPS and EV/EBITDA estimates, respectively, although our sense is that ABFS will need continued high fuel surcharges relative to a year ago to make these numbers. This compares to its 1, 3 and 5 year averages of 11.9x, 11.2x, and 11.6x and 3.9x, 4.0x and 4.2x, respectively. We note if we add in an estimated $825M in pension liability that it would cost ABFS to exit its multi-employer to its current EV and add about $17M back to EBITDA as a rough estimate of potential savings from a single employer plan, ABFS’ EV/EBITDA would be a much higher than historical 7.7x. We retain our Peer Perform rating on ABFS.
What does ABFS’ report mean for other LTL providers? We were not sure as we have noted previously in preview notes, whether the LTL providers would continue to make money on fuel surcharges net of higher fuel costs in a rising fuel environment, given a recent more competitive rate environment and some customers capping fuel surcharges. Our sense is that ABFS’ report is likely evidence that they did benefit in a rising y-o-y fuel scenario and others should also. We suspect ABFS reported in-line despite better than expected tonnage and yields because pricing is very weak but fuel surcharges helped stem some of that negative drag. Below we estimate that ABFS benefited about $0.09/share in 4Q from higher fuel surcharge net of higher fuel costs. We would expect the other LTL providers to also benefit in 4Q and assuming current diesel rates through the first three quarters of 2008.
