What happened
Shares of less-than-truckload (LTL) carriers XPO (XPO -6.22%), Old Dominion Freight Line (ODFL -7.24%), and Saia (SAIA -21.03%) were all climbing the charts this week on signs that rival Yellow could go bankrupt, freeing up market share for competitors like those three pure-play LTL stocks.
Over the course of the week, XPO, Old Dominion, and Saia all benefited from positive analyst notes as well. As of Thursday's close, XPO was up 14.8% for the week, Old Dominion had gained 15.1%, and Saia had tacked on 10.9%, according to data from S&P Global Market Intelligence.
Image source: Getty Images.
So what
Rumors have swirled all week of a potential bankruptcy for Yellow, which has been struggling for years. A pandemic-era loan and a dispute with its union, the International Brotherhood of Teamsters, are at the heart of the matter, as the company has at least $500 million in debt due next year.
On Tuesday, the company sued the Teamsters for blocking its restructuring plan, saying it was responsible for $137 million in damages. Yellow also stressed that it needed to make reforms in order to compete with non-union carriers, including XPO, Old Dominion, and Saia, and said it would not survive without implementing the restructuring plan.
Though Yellow stock is now nearly worthless, the company is a major player in trucking as the third-largest LTL carrier in the country and fifth-largest transportation company, according to Yellow. It brought in over $5 billion in revenue in the last four quarters, and depending on how a bankruptcy plays out, much of that could now be up for grabs.
Wall Street analysts jumped on the bankruptcy bandwagon this week, with Bank of America upgrading XPO, Old Dominion, and Saia to buy from neutral in response to reports from the Teamsters union that Yellow only has six weeks of liquidity left. The threat of bankruptcy will likely make some Yellow customers reconsider and take their business elsewhere. Other analysts also shared bullish notes on these stocks, unrelated to Yellow's problems.
Evercore ISI upgraded Saia to outperform with a price target of $360, saying that the risk/reward was skewed to the upside even as the industry faces pricing and tonnage challenges. Evercore also raised its price targets on XPO and Old Dominion to $56 and $363, respectively.
Later in the week, Citigroup raised its price targets on all three stocks as analyst Christian Wetherbee noted that estimates are falling in the industry, but performance improved in June, and he sees an opportunity for better trends in the second half of the year.
Now what
Old Dominion, XPO, and Saia are generally considered the industry leaders, and all three are subject to the same market trends.
Old Dominion is seen as the best-in-class operator, with its operating ratio -- the inverse of operating margin -- hitting 73.4% in the first quarter. In an update earlier this month, the company said LTL tons per day were down 14.4% in May, which it said was a reflection of softness in the domestic economy. That tracks with analyst comments above, and that softness is likely impacting Yellow as well.
XPO recently became a pure-play LTL carrier after spinning off its contract logistics and truck brokerage businesses. The company has been focused on growing its business and improving pricing and recently completed the expansion of its Salt Lake City, Utah, service center. XPO also reported a decline in business in May, though a more modest one than Old Dominion, saying that tonnage per day fell 2.3% last month.
Finally, shares of Saia have surged since the start of the pandemic as profitability has improved substantially, thanks to investments in technology, the optimization of its network, and competitive pricing. Like its peers, Saia said tonnage per workday fell 2%, a slight deceleration from April when it was down 1.1%.
For these stocks to be surging back toward recent highs -- or even all-time highs in the cases of Saia and ODFL -- is a bit odd during an industry downturn, but a Yellow bankruptcy would be significant. Keep your eye on that developing story, as these transportation stocks could march even higher if they can pick up some of Yellow's market share.
