YRC Worldwide pulls-back amid Freight Recovery and Dilution Threat
  • Stock Review; YRC Worldwide Shares reverse from Brief Spike
  • YRC Worldwide Shares surge on Positive Signs in Trucking Industry
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    Hot Stock Alert – YRC Worldwide bounces amid Tonnage Recovery and Default Fears

    The shares of YRC Worldwide Inc. (Nasdaq: YRCW) soared 50% over the last three trading days, hitting $1.99 on March 22 on volumes that more than doubled its 90-day average. The recent surge was driven by recovering freight volumes in 2011 as well as the trucking company’s announcement that it plans to hire nearly 1,000 drivers this year.

    Despite the growth, YRCW shares lost 42% in 2011 due to challenging conditions in the trucking industry that caused the company to lose money over the last three years. The company is currently struggling to avoid bankruptcy under a heavy debt load and tough competition.  It negotiated with its lenders to soften the terms of its debt, asked workers to accept pay cuts, proposed debt-to-equity swaps and sold real estate to continue operations.  With a 52-week range of $1.19-$20, the March 22 trade is in the lower end of that range.

    For the full year 2010, YRCW reported a net loss of $322 million or $8.13 per share, compared to a net loss of $622 million for 2009. The revenue in 2010 declined 12% to $4.3 billion from $4.9 billion in 2009.

    The trucking company has recently reported that it failed to get the necessary approvals, from certain pension funds, for its financial restructuring plan to convert some of its debt into stock. Accordingly, lenders could declare the company in default and push it toward bankruptcy immediately. While the lenders have not yet indicated they are going to declare YRCW in default, a number of rating agencies downgraded the company’s credit rating implying highly speculative or junk class.

    The trucking industry was beaten exceptionally hard during the economic crisis with nearly 2000 companies wiped out of business and others shrinking the size of their fleets. Only in 2010 demand begun to recover, giving truckers improved fundamentals. For 2010, the trucking tonnage was up 5.7% compared with 2009, according to American Trucking Associations (ATA). During the first two months of 2011, the trucking tonnage continued the upward march with a year over year growth rate of 7.6% in January and 4.2% in February. ATA estimates were also confirmed by the financial reports from the major tracking companies, which evidenced that shipment weights and load counts are both increasing as various markets recover. Truck freight volume, however, remains quite unpredictable.

    Over the last quarters, YRCW has begun to show signs of recovery, albeit at a lower pace than its competitors. The company’s revenue increased 3.9% to $1.09 billion in Q4 2010 from 1.05 billion in Q4 2009, beating analysts’ average forecast of $1.07 billion, according to Thomson Reuters.

    As a part of recovery plan, YRCW has been selling assets, reducing costs through layoffs, while working to recapitalize and reduce the debt levels. During 2010, it succeeded to shrink the debt by $73 million. The debt balance of $1.05 billion, as of December 31, 2010, threatens severely the company’s ability to continue operations, despite the improvements in cash flow generation. In addition, the deal to convert more than $470 million debt to equity was recently halted raising the default likelihood.

    Going forward, YRCW plans to continue negotiations to soften the huge debt pressure, while continuing cutting on expenses and optimizing the fleet management to create greater density moving to and from its delivery terminals. Favorable industry trends combined with an optimized cost structure and highly leveraged balance sheet positions YRCW well to generate significant returns to its shareholders if it succeeds to breakeven. However, the company failed to keep up the recovery speed at the industry’s level in 2010, losing market share to its direct competitors, which reported better growth rates and momentum in 2010.

    As the freight levels are expected to keep up the same growth pace in 2011, YRCW has another opportunity to capture the industry’s expansion and with a better cost structure to breakeven. However, the analyst consensus is betting that YRCW will continue reporting losses in 2011 and 2012 on flat revenue. The default threat as well as pending dilution to existing shareholders could further take a toll on the company’s valuation.

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