Arkansas Best Corporation – report from 31 January 2008
ABFS and the Teamsters announce tentative 5-yr labor agreement. Yesterday ABFS and the Teamsters announced a tentative agreement 2 months ahead of the March 31st expiration.
ABFS’ Teamster employees to receive same standards as YRCW. ABFS has agreed to the same standards as YRCW, now being called the National Freight Industry Standards Agreement. The key provisions under this contract are 1.9% and 7.0% wage and benefit CAGRs, totaling 3.9% overall cost growth per hour per year, up from 3.4% in the prior contract. We expect the deal to be ratified along with the YRCW deal on Feb. 8th.
No withdrawal from Teamsters’ multi-employer pensions. ABFS will continue to contribute and be liable to its multi-employer pension plans under this contract. Although a withdrawal would have required material financing costs, remaining in will result in pension expense growth of about 9% per year. Also, ABFS USD 800M-USD 850M current withdrawal liability will continue to change outside of management’s control.
FASB may chime in. FASB is currently in the research phase of overhauling its standards for multi-employer pension accounting. One key change currently under consideration is moving multi-employer liabilities onto company balance sheets similar to Int’l standards. We believe this would take 3-5 years to implement but it seems to be gaining momentum as a result of the new Pension Act effected Jan. 1st.
Stock feels ahead of itself in the near term. ABFS’ stock is up 65% from its lows in early Jan. into a sense that trucks will see demand bottom before the economy, the Fed’s more aggressive stance, and generally better than expected truck reports. While the near term news about ABFS not being allowed to withdraw from the Teamsters’ pensions could be viewed as positive for intermediate term earnings, we believe it poses a serious long-term risk to ABFS.
INVESTMENT CONCLUSION: ABFS closed up 4% yesterday versus our LTL index ex-ABFS up 3% and the S&P 500 down 0.5%. We believe the market viewed the early contract as well as ABFS not withdrawing from its multi-employer pension plans positively in the near-term, but we are not sure this is the right reaction over a longer time horizon. Although ABFS not withdrawing removes near-term risks of raising capital, adding major leverage to its balance sheet and material financing costs, we believe the long-term risk of remaining contributors is great. We have serious long-term concerns about the Teamster multiemployer pension system, which punishes surviving employers by making them liable for bankrupt companies’ pension costs and is driving the 9% pension expense increases in this contract. We believe if another large contributor to these plans were to go bankrupt and be unable to fund its withdrawal liabilities, these would shift to ABFS and the other remaining employers and would likely drive up pension expenses and withdrawal liabilities further.
ABFS is currently trading at 12.9x and 3.7x our forward EPS and EV/EBITDA estimates. 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. We believe the recent run up in the truck sector has been largely short covering and long investors seeking early cyclicals with leverage into the Fed Easing cycle, and ABFS, as well as the rest of the group, are likely ahead of themselves in the near term.
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