How the mighty have fallen.
From mid-January to early July, shares of less-than-truckload, or LTL, trucker YRC Worldwide (YELL 3.50%) went on an absolute tear. Like a runaway semi speeding down a 15-degree decline with no brakes, YRC Worldwide shares sped up at a crazy pace, achieving 131% gains in less than six months. Fast-forward two more months, though, and the shares are up barely 5.5% for the year.
YRC drew its employees a bleak picture of the company's fate, in the event teamsters rejected its last contract offer. (They didn't.) Source: Nov. 5, 2013, YRC Worldwide presentation to Teamsters union.
So what happened to YRC Worldwide?
Promises go before the fall
If we begin this story at the beginning, then it makes sense to start with YRC's wild ride up the mountain, which started back in January.
As you may recall, YRC had been negotiating with its teamsters union for some time over a plan to secure contract concessions from its drivers -- and then present these concessions to its lenders as a sort of peace offering. By showing that it was cutting costs and positioning itself for a return to profitability (as opposed to bankruptcy), YRC believed it could renegotiate the terms of repayment of its massive, billion-dollar-plus debt load. Renegotiation, YRC believed, would allow it to avoid this fate.
The plan worked.
By the end of January, YRC management was able to confirm that its teamsters had voted voted 66% to 34% in favor of extending a previous 15% wage cut all the way into 2019. And with America's economy reviving, and the trucking business with it, there was every hope that this would give YRC enough time to return itself to profitability, begin paying down its debt, and lighten its load of interest payments on that debt. The more YRC's debt shrank over time, the more profitable it would become (or so shareholders believed). And so the shares soared.
Reality bites
Of course, the operative word in all of this was "time." Given the size of YRC's debt load, and the enormous interest payments it was required to make, profitability was not expected to arrive immediately. Even as late as July, investors were still expecting YRC to be reporting modest losses of about a penny a share.
What shook investors' confidence, though, and wiped out almost all of the stock's gains for this year, was when YRC admitted on July 31 that it's latest quarterly loss was not "a penny a share" -- but a whopping $0.16 per share. That news alone sparked an 18% decline in YRC's share price, and with the exception of a brief surge earlier this month, it's been mostly downhill since.
What next?
Does YRC Worldwide deserve the disdain investors have heaped upon it lately? That really depends.
Viewed from one perspective, the company is really still sort of a basket case. YRC's debt load, at roughly $1 billion net of cash, is about half again as big as its market capitalization ($650 million). Annual revenues, just under $5 billion for the past 12 months, have hardly budged since 2011 ($4.9 billion). As already mentioned, the company's not earning a profit on these revenues, and S&P Capital IQ data confirm that YRC continues to suffer from negative free cash flow -- as it has, indeed, for years.
On the plus side, interest expenses on YRC's debt load declined by more than $10 million year over year in the second quarter. Over time, those savings should add up. Meanwhile, revenues at YRC were up 5% year over year in fiscal Q2 -- a trend that, if it continues, should help YRC to better leverage its large trucking fleet to earn more profits.
That's not happening yet, however. To the contrary, cost of goods sold rose 10% in Q2 -- twice the rate of revenue growth, while operating expenses were up 14% -- nearly three times the rate of revenue growth, and enough to more than offset savings on interest.
The road ahead
To hear management tell it, the road ahead is wide open for YRC to prosper. YRC Freight President Darren Hawkins said his division of the company is winning "significant contractual negotiated pricing increases" and sees such increases continuing in the future. "With continued improvement in the economy and our service levels, we expect our ability to increase pricing should remain strong," Hawkins told investors in July.
To win those investors back, however, YRC needs to do a better job of capitalizing on the better revenue levels, and the reduced interest costs, by keeping other expenses in check. Unless and until that happens, investors may have to content themselves with single-digit gains in YRC Worldwide stock... and count themselves lucky to get even those.
