Why Yellow Roadway can make you serious green

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.

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2 Responses to Why Yellow Roadway can make you serious green

  1. YELL-O-BRICK- ROAD says:

    I had purchased YRCW at $22, when its symbol was YELL(I loved this symbol)……..
    I hung on to it for 3 years, and finally just sold it at about $40….I always felt it should
    have gone up a lot further because compared to its peers it was “a True Value Stock”
    1. I was mad when they changed the symbol…many people “lost it” when it changed…
    and therefore the volumes were way way down…….so no one really “knows” about the company. 2. I didn’t feel the company was doing enough to get “its name out there” to the institutional investors, who are the ones that,” makes the markets move”…volume continued to be in the very low volume area, for such a large capitalized company….
    so I sold, because they just said that “sales are down because of the downturn in the economy” even tho I am sure this was built into the price because the price didn;t really move at all (down) in fact it has trended upward now…..go figure!

  2. loslobos71 says:

    Yeah, I agree that this stock isnt on the watchlist of many hedge funds/ investment banks. But I think that when they realize that this company is actually a great performer it will be more heavily traded, and probably go up. For exmaple, there are only 13 analysts that cover this company ($10 billion revenue) but 19 who cover CH Robinson (CHRW) which only has $6.5 billion in revenue. To contrast both of these, Electronic Arts (ERTS) has $3.1 billion in revenue (30% of YRCW’S) but 32 anaylsts-almost triple!

    In any case, they just reported a great quarter, despite the weakening economy, and issued a good outlook for 2007. They said that theyll earn between $4.7 – $4.9 per share in 2007, which puts them at 9.2- 9.5x earnings–still cheap!

    With regards to bad volume being bad, I don’t think that thats neccesarily true. VF Corporation, for example, has a $9 billion market cap and trades 650,000 shares per day. But look how well its done- http://finance.yahoo.com/q/bc?s=VFC&t=my

    Thanks for reading!
    The Stock Geek, Stu

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