Don't Hitch a Ride With Arkansas Best

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Trucking giant Arkansas Best (NASDAQ: ARCB  ) may not enjoy the fruits of a slowly recovering economy that's pushing the industry in general higher. There remain a number of speed bumps ahead that investors need to be mindful of before getting behind the wheel of this big rig.

Caution: Contents may be hot
The DAT North American Freight Index, which measures the spot market of freight availability in the U.S. and Canada, increased 5% in December from the year-ago period, reflecting rate increases truckers were able to push through and the need to ship more goods across country.

But those industry figures were down sharply from November, falling 18% sequentially, and while a decline of a large magnitude is typical of the season -- on average, the index has fallen 13% over the past five years from November to December -- it heralds a lot of uncertainty as rates and volume flatten out.

How do you rate?
Large trucking companies including the industry's biggest, JB Hunt (NASDAQ: JBHT  ) , and Old Dominion Freight Lines, with annual revenues of $4 billion and $2 billion, respectively, are more confident they'll be able to raise rates going forward -- and both FedEx (NYSE: FDX  ) and UPS (NYSE: UPS  ) pushed through another round of rate increases to start off the new year -- while 20% of the smallest truckers surveyed think rates will actually decline over the next year.

With $2 billion in annual sales, Arkansas Best operates one of the largest less than truckload (LTL) carriers in the country, ABF Freight Systems, but it's in the middle of contentious contract negotiations with the Teamsters, as it twice sued the union and YRC Worldwide for violating the industry's National Master Freight Agreement, which was supposed to equalize Teamster labor and benefit costs across the industry -- but a judge has twice thrown out its suit.

Going hat in hand
Where Arkansas Best says labor costs are a contributing factor in its reporting losses of $290 million over the past three years, the union retorts that it hasn't stopped executive compensation from rising, noting that the CEO's non-cash compensation jumped 50% in 2011. While that may be true, at $1.3 million annually, AB says she's also paid about 40% less than her industry peers, including YRC's CEO, who made $2.5 million, and that management costs are less than one half of 1% of the trucker's total expenses.

For perspective, JB Hunt's CEO makes $5.3 million, Old Dominion's earned $3.0 million, and Werner Enterprises' top guy made $1.4 million. The real beggar in the bunch is Swift Transportation's (NYSE: SWFT  ) CEO, who earns just $812,000 a year.

On the other hand, AB's Teamster members are the highest-paid drivers in the industry. The cost structure it's dealing with puts them in an uncompetitive situation, and it's losing market share, making the situation unsustainable. With the contract due to expire at the end of March, Arkansas Best needs to close these negotiations before its customers end up choosing a new logistics provider, but even if the trucker wins concessions from the union, analysts doubt they'll be enough to make it competitive with its rivals.

Terminal velocity
While labor costs are certainly a big factor, they're not the only one to contribute to AB's problems. It operates a network of 265 terminals, more than Old Dominion at 217 and privately held Estes Freight Lines at 191. But AB is handling only 70 shipments per day per terminal while it handled 184. YRC operates 282 facilities at last count and handled 155 shipments per day. It suggests AB's that terminal network is too large for the volume of business it carries, though if it could reduce labor costs, it ought to be able to be more price competitive, which in turn would allow it to handle more business at its terminals.

The trucking industry has been on the road to recovery, but it's been one marked by many potholes, including onerous regulations on the environment, drivers, and the truckers themselves. More new rules are due later this year, which is why analysts see the back half of 2013 as a critical juncture. Arkansas Best might be able to navigate the path through the morass, but like all those big rigs we see skidding into the ditch on the TV show Ice Road Truckers, AB may also find itself disabled on the shoulder.

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