YRC Worldwide Is Better Than You Think

YRC Worldwide (Nasdaq: YRCW  ) may be better than you think.

In the daily noise machine of CNBC, analyst estimates, and quarterly announcements, investors are inundated with talking heads obsessing over earnings-per-share figures.

Earnings, or net income, is an accounting construction that is the basis for the price-to-earnings ratio, the most popular way of measuring how cheap or expensive a stock is.

But free cash flow -- the amount of cash a company earns on its operations minus what it spends on them -- is another, oftentimes more accurate measure of earnings that can give you an advantage.

How YRC stacks up                                          
If YRC tends to generate more free cash flow than net income, there's a good chance earnings-per-share figures understate its profitability and overstate its price tag. Conversely, if YRC consistently generates less free cash flow than net income, it may be less profitable and more expensive than it appears.

This graph compares YRC's historical net income to free cash flow. (I omitted various gains and charges such as tax deferrals, restructurings, and benefits related to stock options.)

Source: Capital IQ (a division of Standard & Poor's) and author's calculations.

As you can see, YRC has a tendency to produce more free cash flow than net income. This means that the company may be more profitable than investors think.

There can be a variety of reasons to disregard such a discrepancy; for example, free cash flow can overstate earnings in businesses with volatile working capital needs, or understate earnings in high growth companies that are reinvesting capital in the business.

Alternatively, in cases where free cash flow more accurately measures earnings, such a discrepancy can indicate a company that is more -- or less -- expensive than investors realize.

Let's examine YRC alongside some of its peers for additional context:

Company

Earnings (in millions)

Free Cash Flow (in millions)

YRC Worldwide ($183) ($77)
Con-way (NYSE: CNW  ) $31 $9
J.B. Hunt Transport Services (Nasdaq: JBHT  ) $226 $49
Old Dominion Freight Line (Nasdaq: ODFL  ) $107 ($52)

YRC doesn’t have a price-to-earnings or a price-to-free-cash-flow multiple because the company was unprofitable on both measures over the past 12 months.

However, unlike its peers, YRC has a tendency to generate much more free cash flow than net income, suggesting the beleaguered and restructuring trucking company is not as unprofitable as many investors might think. That being said, I'm not suggesting investors rush out to buy this stock -- the problems the company faces are very real.

If you’d like to stay up to speed on the top news and analysis on YRC or any other stock, add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

Ilan Moscovitz doesn’t own shares of any company mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 30, 2011, at 4:46 PM, quickymart wrote:

    Poor article with limited depth. Free cash flow is a weak metric for YRCW because they've grossly under-invested in their trucking fleet. They have one of the largest fleets in trucking, but compare their capital expenditures over the past few years to any of the other larger truckers and you can see they've starved their fleet in order to limit their cash burn. Furthermore, results would be much worse except for waivers and concessions from banks, pensions and employees - contituencies that will want a sizeable piece of the pie, if YRC ever starts generating any profit.

  • Report this Comment On August 30, 2011, at 6:22 PM, easygoer4u wrote:

    Why on earth would YRC ever want to show being profitable? And give up all the concessions their ripping off their employees until the year 2015.

  • Report this Comment On August 31, 2011, at 2:04 PM, billscarver wrote:

    YRC did not have show normal CAPEX becuase they merged the fleets of Yellow and Roadway, taking the best and newest equpment from both while contraction of operations took place similtaniously. Free cash flow is an excelent metric, and probably YRCs saving grace. Their equipment is as up to date as the competition, and they didn't have to spend the money to get it that way. CASH IS KING!

  • Report this Comment On September 02, 2011, at 4:48 PM, rhuntjr wrote:

    Investors in CNW are paying a Ferrari price for a Yugo. CNW's current stock price implies that revenues will increase by 17% per year for the next nine years, while margins will increase by 50%. Those are extremely optimistic assumptions for a trucking company that hasn't seen that kind of growth in over a decade and a half.

    CNW's performance certainly doesn't justify that price premium. The company's 3-year average return on invested capital is a meager 2.5%.

    Investors in low-return trucking companies like CNW need to pull their heads out of the sand and see that their hard-earned money is not being put to a productive use. Better opportunities are out there. It takes hard work to understand expectations embedded in stock price to avoid losers like CNW. If you're a dedicated investor who wants a better investing framework to guide you, I highly recommend taking a look at this blog post:

    http://blog.newconstructs.com/2010/05/19/how-to-make-money-p...

  • Report this Comment On September 08, 2011, at 9:02 AM, sprintcar22 wrote:

    Its all a shell game at yrc. It will be that way until contract is up then u will see what its all about.Holland is buying yrc JUNK tractors for outrage prices then having to stick lots money in them.WE used to get NEW tractors every 3 yrs not anymore.They also charge all kinds of things to regional carriers Holland,New Penn, Reddway,all a shell game.All they need to do is CLEAN HOUSE at the TOP.YES I do work for Holland an yes we have the best on time del.-lowest damage rate of ANYBODY And guess what we are UNION but we take pride but its getting harder every year Holland always made good money and us drivers did too ,until YRC.PUT HOLLAND up against any NON-UNION CO. and see what happens,shows u can still pay drivers good wages,penison,health ins. If u dont have good management just look at YRC an you see what HAPPENS

  • Report this Comment On September 12, 2011, at 11:26 AM, jed71 wrote:

    The reason YRCW's cash flow is better than earnings is because of heavy depreciation boosting the cash flow statement. This will eventually run out, though. All it means to me is that they are no longer investing in newer fleet vehicles and other capital items that would help ensure their longer term viability. I don't think this is necessarily a good thing, as the author seems to suggest. To me, this means they are conserving cash as best they can, which also indicates that they are having difficulty getting someone to lend them money for new capital items. Still seems like a sell to me, and I guess at $0.37 as of this post, investors seem to think the same.

  • Report this Comment On September 26, 2011, at 7:03 PM, Mega wrote:

    Ilan -

    YRCW is worse than you think.

    Last I checked, having negative FCF and being on the edge of bankruptcy was a bad thing.

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