ARCB Chart

In 2015, ArcBest shares have gone nowhere but down -- but they could be primed to rebound. ARCB data by YCharts.

"Company X misses earnings, shares rise 2%."

It's not often you see news like that in the stock markets, but it's just such a happy confluence of circumstances that shareholders of ArcBest Corporation (NASDAQ:ARCB) have enjoyed since their company reported earnings last week.

The news
Announcing fiscal Q3 2015 financial results early Friday morning, ArcBest revealed that:

  • Quarterly revenues slipped less than 1% in comparison to last year's Q3.
  • A 10-basis-point improvement in operating profit margins (to 4.7%) enabled ArcBest to grow operating profits by about 2% despite the sales slump.
  • Net profits ended at $0.72 per share, flat against last year's Q3 results, but below analysts' expected pro forma profit of $0.79. 

All in all, ArcBest described its results as "solid ... given weaker than expected freight markets." And it seems investors agree, having bid the shares up by about 2% since earnings came out. But why are investors so willing to forgive the earnings miss?

The economy
According to ArcBest, the primary reason it failed to meet expectations last quarter was the American economy at large. "High inventories" meant less need for customers to order new goods for shipment. Factor in "lower industrial-related manufacturing production, and weaker consumer spending," and ArcBest's freight tons shipped, and revenues charged, both dropped by about 2%.

More of the company's fleet also sat idle in the quarter, with ArcBest's "operating ratio" dropping 50 basis points in comparison to last year's Q3 -- although it still achieved a respectable 94.7%.

Perhaps aiming to offset this falloff in business, though, ArcBest took advantage of a rate hike from rival trucker and XPO Logistics subsidiary Con-Way last month. Con-Way had upped its less-than-truckload-weight rates by 4.9%, and ArcBest followed suit with its own 5% rate hike on freight shipments on Oct. 5. Although "general" in scope, ArcBest says the rate hike will apply to only about 35% of its freight business -- presumably because the rest is locked in at contract rates.

What's next
Whether this rate increase will be enough to move the needle on ArcBest's business -- and move it in the right direction -- remains to be seen. Analysts quoted on S&P Capital IQ are predicting the company will indeed grow earnings, and at a robust 19% annualized rate over the next five years.

The stock is currently valued at just 12.5 times trailing earnings, suggesting ArcBest stock is bargain-priced if the expected growth materializes. What's more, when you examine the company's cash flows, ArcBest could be even cheaper than it seems.

Valuing ArcBest
Fiscal 2015 has not been kind to ArcBest on the cash flow front, with only $66 million in positive free cash flow generated year to date -- a 30% reduction in cash production rates from where the company was 12 months ago. On the other hand, $66 million is 65% more cash profit than the company has reported as net income so far this year, and it leaves ArcBest with trailing free cash flow of nearly $80 million for the past 12 months.

What this means is that the stock currently costs just 8.4 times trailing free cash flow. If it can grow this cash profit at anywhere near the 19% rate analysts project -- indeed, if it grows even half as fast -- the stock looks like a pretty incredible bargain right now.

Rich Smith does not own shares of, nor is he short, any company named above. You can find him on our virtual stockpicking service Motley Fool CAPS, where he posts his favorite (and least favorite) stocks under the handle TMFDitty -- and where he's currently ranked No. 299 out of more than 75,000 rated members.

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