For those who don’t know, Yellow Roadway Coorporation is the largest less-than-truckload (LTL) transporter in the US. Basically they transport another company’s goods from point A to point B using their drivers and fleet. With $10 billion dollars in annual sales, YRC has the economy of scale to purchase fuel and trucks at a cheaper prices than competitors. As you can imagine, the trucking industry is extremely cyclical, demand for trucks picks up when the economy, both US and abroad, is strong and slows down in weak economies.
Investors in LTL companies are primarily investing in them for two reaosns: a) they think that the economy will be strong and/or better than expected and b) they think that the management has the ability to protect the company and protect margins in future slowdowns.
I’m going to be the first to tell you that I have absolutely no idea what the economy will do over any period of time. So that rules out “a.” Lets talk about “b” The trucking industry has been consolidating over the past few years, and YRC has definitely not been left out. With the acquisitions of USF and Roadway, YRC has the ability to carry and size of goods for any time frame across any region. In addition, management believes that there will be tremendous synergies between the three companies due to a larger economy of scale and reduced overlap between the routes of the three companies. Besides the core trucking porftfolio, YRC has initiated two new “projects:” Meridian IQ and the China initiative. The former is YRC’s entry into the non-asset based 3rd party logistics service (abbv. 3PL). Using YRC’s extensive knowledge and technology, they plan other companies’ logistics needs. Because there are no assets involved, they are protected from much downside in slow macro environments as they don’t have any idle equipment or drivers. This segment is a primary beneficiary of globalization because companies are outsourcing the production of a lot of work and they need to move it from country to country safely and timely. The china initiative will bring YRC into the highly lucrative Chinese market, where there are 1.3 billion people and an economy growing 10% a year.
Turning to valuation for a moment, the stock is trading at less than 5 x cash flow and 8x earnings, compared to its 5 year average of 18 x earnings and 5.5x cash flow. At these rates, a slowed US economy is priced into the shares already and any strength in the economy will bring upside to shares of YRCW
With the addition of USF and Roadway, and the company’s foray into logistics and China, YRC’s management is commited to growing the company even in a slow US economy. Even though the company’s results may not be stellar during this time, significant cost reductions should limit bottom-line impact.