Con-way Inc.'s Latest Earnings Report Smells Funny

This week in trucking news: Yet another trucker reported disappointing earnings news last night.

Following reports of declining profits at both J.B. Hunt Transport Services, (NASDAQ: JBHT  ) and smaller Werner Enterprises (NASDAQ: WERN  ) in recent weeks, we probably shouldn't be surprised to note that when Con-way Inc. (NYSE: CNW  ) pulled up to the dock and delivered its own news last night, it made it tic-tac-toe, three in a row.

Here are the highlights:

  • Sales for the first quarter of 2014 inched up 2.5% to $1.37 billion, just ahead of analyst estimates.
  • Operating profit margins remained stuck in neutral at 2.4%.
  • With taxes taking a bigger bite out of this year's Q1 operating profit than they did in Q1 2013, net profits declined 12% to $0.22 per diluted share.

And yet, the news wasn't all bad. For one thing, Con-way can hardly be blamed for the IRS walking off with its cash. For another, the $0.22 that Con-way was left with after the taxman went away, was still a good $0.06 per share more than Wall Street was expecting the company to earn. And as management was quick to point out, its pro forma profits for the quarter actually increased 11% in comparison to last year.

So, on balance -- and especially in the context of the reports coming out of rivals J.B. Hunt and Werner -- I have to say Con-way's quarter really didn't look that bad. True, the same "severe winter weather" that everyone else is also complaining about hit Con-way hard. But CEO Douglas Stotlar echoed sentiments also noted by Werner last week, to the effect that demand for trucking services seems "strong ... with improving operating fundamentals."

In freight, Con-way's biggest business by revenues, sales were up 2.5% year over year, in line with overall growth at the company. Logistics, Con-way's second biggest business, grew sales 3.6%, while truckload weight deliveries suffered a small revenue decline due to "a 1.1 percent decline in loaded miles" (i.e., more trucks driving empty). This, too, Con-way blamed on the weather, which Stotlar says "affected efficiency, maintenance, fuel cost and asset utilization."

Probably the very best news of the quarter, especially in the context of Werner's comments, was the fact that when Con-way did have its trucks on the road, and fully loaded, operating profits at the freight business grew 15.9% as strong demand for trucking services held Con-way hold firm on prices. If that trend holds true in coming quarters, maybe Con-way's profits can begin to follow its revenues: up.

Foolish final thought
One final point -- and this concerns something which didn't make it into Con-way's earnings release, so you may not have heard about it yet. Failing to include a cash flow statement in its release, Con-way neglected to mention one important fact that was however reflected in its simultaneously filed 10-Q quarterly report: Free cash flow at this trucker drove off a cliff in Q1.

Con-way says it "earned" $12.9 million last quarter. Well and good. But according to its cash flow statement, the company actually consumed $4.5 million in cash in the quarter (a reversal of last year's positive Q1 cash flow of $27.3 million). Con-way then compounded its cash-burn problem by spending $70.5 million on capital expenditures, nearly 42% more than it needed to invest in last year's Q1.

Result: Free cash flow for the first quarter of this year came to negative $75 million. That's a far cry from the company's supposed, and better-publicized $12.9 million in positive GAAP profit. It's also, in my view, a good reason to think long and hard before deciding you want to own this stock.

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