Copyright 2003, Traffic World, Inc.
Truckers are reporting rosier earnings but there are caution flags rising behind all the glowing numbers, analysts are saying.
All the major publicly held companies are reporting strong fourth-quarter and improving full-year earnings. But caution is advised before rushing out to buy trucking stocks, analysts say. First, if you're looking for value in the stock market, trucking is not it. Trucking stocks enjoyed a nice run-up last year, so valuations already are somewhat high. Second, comparisons with the 2001 fourth quarter are bound to be favorable as that year-ago period was a deep trough for trucking. Third, the 2002 fourth-quarter numbers for the major national carriers are skewed because the Labor Day demise of Consolidated Freightways dropped hundreds of millions of dollars worth of freight business into the laps of its major competitors.
Still, for an industry that's been down as long as LTL trucking, any silver lining is worth celebrating - even if carriers are warning analysts that their first-quarter and first-half numbers may be disappointing.
Roadway Corp., reported earnings of $13.4 million from continuing operations for its 12-week fourth quarter on record quarterly revenue of $1.07 billion. Including soon-to-be-sold Arnold Transportation Services' results, Roadway reported net income of $28 million.
For the year, Roadway's earnings from continuing operations were $35.1 million, a 14.6 percent increase from 2001 earnings, on revenue of $3.01 billion, up 8.3 percent from 2001 revenue of $2.78 billion. Including ATS's results, net income for the year was $38.9 million.
"We are pleased to end 2002 with a strong fourth quarter and reasonable optimism for the future," said Roadway Corp. Chairman and CEO Michael Wickham. "We began 2002 with concern over the economy and in January experienced tonnage levels at their lowest point in 15 years. Throughout the year, the economy lacked energy and never shifted into the long awaited recovery mode."
Roadway Express, as well as Yellow Transportation and ABF Freight System, has enjoyed a double-digit fourth-quarter bump-up in revenue has along with a rise in fourth-quarter earnings as a result of the Sept. 3 closing of Consolidated Freightways, a $1.5 billion long-haul rival. The carriers have adjusted rates on that old CF freight to the point where they say they are making money on it now.
"It would not be on Roadway trucks had we not gotten increases from CF rates," Wickham said.
Wickham said CF's Labor Day closing "has not overly taxed our system and we are able to meet our customers' requirements. We do not anticipate the need to add capacity until the general economy grows 5 to 6 percent on a year-over-year basis. As might be expected, such a large reduction in capacity has firmed our segment's pricing environment considerably."
Last December, Roadway announced an agreement to sell Arnold Transportation Services for $55 million because as a truckload carrier it was not core to its LTL strategy. The ATS sale to a management group led by ATS President Michael S. Walters and the Jefferies Capital Partners closed last week.
"We believe the short-term earnings reduction caused by the sale of ATS will be partially offset by our use of most of the sale proceeds to pay down debt and generate savings from lower interest expense," Wickham said. "Overall, this sale better positions the corporation to pursue additional LTL opportunities."
For accounting purposes, ATS's results are being treated as a discontinued operation and its earnings removed from operating income. For comparative purposes, that has the net effect of reducing annual revenue by $171 million and operating income by $6.1 million. If the ATS revenue and its annual operating income were included, consistent with the company's fourth-quarter projections, the corporation would have increased revenue by 30 percent and improved its operating ratio by 2.4 points for the quarter.
Roadway predicted its operating margin in the first quarter would be between 2 and 2.5 percentage points with daily revenue growth in the first quarter between 17 and 22 percent. That reflects growth in tonnage picked up from old CF accounts as well as the fact that this year's 12-week first quarter for Roadway has four additional business days compared with last year's period.
Roadway Express posted a 97.6 operating ratio for the year, 95.4 in the fourth quarter. New Penn, its Northeast regional carrier, reported an 88.7 OR for the year, 86.7 in the fourth quarter. New Penn's inclusion accounted for just over 70 percent of the increase in Roadway Corp.'s overall operating income, according to J. Dawson Cunningham, Roadway's CFO.
Roadway benefited immediately from CF's closing in September. But that accounted for nearly all the tonnage growth for Roadway, Cunningham said, meaning there was virtually no non-CF growth last year.
Ed Wolfe, Bear Stearns trucking analyst, noted that it appears Roadway has been more aggressive than long-haul competitor ABF in chasing old CF freight.
Wolfe noted that Roadway's tonnage was up 16.6 percent year over year in the fourth quarter, while ABF's tonnage rose just 6.5 percent by comparison. Roadway's yield, without the fuel surcharge, rose 2.7 percent year over year in the fourth quarter compared with ABF's 5.9 percent increase in yield in the same span, Wolfe noted. That would seem to make a challenge for Roadway to hold onto its recent rate increases with some customers, Wolfe said in a note to investors.
Besides pricing, the overall sluggish economy still remains a major concern to the long-haul carriers. "I would characterize it as not any improvement over the third quarter on business levels," Wickham said. "The activity in the fourth quarter was flat compared with the third quarter, seasonally adjusted."
Wickham said carriers have been able to sustain reasonable rate increases over the past three years because of capacity coming out of the LTL market. "Over the past few years, with that culling out of the market, pricing has stabilized to a point which we haven't seen in several years. You're not going to be able to stretch it to 6 or 7 percent (annual rate increases). We think where we are and where we have been is sustainable given the market," Wickham said.
Yellow Corp., Overland Park., Kan., parent of the second-largest LTL carrier, Yellow Transportation, reported $23.9 million net income on revenue of $2.55 billion, compared with earnings of $10.6 million on $2.49 billion revenue in 2001.
Still Yellow Corp. enjoyed a 19 percent rise in revenue in the fourth quarter compared with year-ago levels and total debt was reduced by $237 million, or 66 percent, from the end of 2001.
Yellow Transportation, its largest unit, doubled its fourth-quarter operating income to $29.6 million on $692 million revenue, compared with $12.4 million in 2001. All financial results presented are for the "new" Yellow, with SCS Transportation recorded as discontinued operations.
"During the fourth quarter, we brought on additional business from industry consolidation in a prudent and disciplined manner," said Bill Zollars, chairman, president and CEO of Yellow Corp. "The impact of these efforts is evident in our strong operating results. In addition, our portfolio of transportation solutions is meeting the complex needs of our customers."
For the year ended Dec. 31, Yellow Corp. reported the following consolidated results:
-- Earnings per share from continuing operations excluding unusual items of $1.03, vs. 56 cents in 2001.
-- EPS from continuing operations including unusual items of 84 cents, vs. 43 cents in 2001.
-- Operating revenue of $2.62 billion, up 4.8 percent from $2.51 billion in 2001.
-- Operating income, excluding unusual items, of $55.3 million, up from $43.6 million in 2001.
-- Operating income, including unusual items, of $46.9 million, up from $38.2 million in 2001.
-- Total debt was reduced to $124 million at the end of last year, a 66 percent reduction from the $361 million debt at the end of 2001. Debt-to-capitalization ratio is 21 percent compared with 41.1 percent at the end of 2001.
Yellow Transportation reported fourth-quarter results as follows:
-- Revenue of $692 million, up 17.1 percent from $591 million in 2001.
-- Operating income, excluding unusual items, of $29.6 million, up from $12.4 million in 2001.
-- Operating ratio, excluding unusual items, of 95.7 compared with 97.9 in 2001.
"Yellow Transportation more than doubled fourth-quarter operating income," said Zollars. "That represents solid performance."
Yellow's LTL revenue per day was up 18.3 percent from the fourth quarter of 2001, primarily reflecting a 13 percent increase in LTL tonnage per day and a 4.6 percent improvement in LTL revenue per hundredweight (3.4 percent excluding fuel surcharge). Virtually all that tonnage growth in the quarter was traced to the demise of CF.
For the year Yellow Transportation reported the following:
-- Operating revenue of $2.55 billion, up 2.2 percent from $2.49 billion in 2001.
l Operating income, excluding unusual items, of $71.1 million, up 21.2 percent from $58.7 million in 2001.
-- Operating ratio, excluding unusual items, of 97.2 vs. 97.6 in 2001.
"For the full year, revenue was up about $55 million and operating income, excluding unusual items, was up over $12 million," Zollars stated. "The 23 percent incremental margins on that revenue increase reflect outstanding cost management and operational excellence."
Zollars said he is predicting "a relatively flat economy in 2003" and expects consolidated revenue for the year to be between $2.8 billion and $2.9 billion. The first quarter is Yellow's "most challenging quarter," Zollars said, with additional expenses of approximately $4 million for its biennial Transformation Conference held recently in Las Vegas and $2.5 million in additional nonunion pension costs.
Bear Stearns' Wolfe said he had three basic reasons to stay low on trucking stocks for a while. Wolfe said he believes there remains too much capacity unless there is a significant improvement in the economy; consensus numbers have remained "back ended and too high"; and there remains the possibility of material freight diversion related to the Teamster negotiations.
Arkansas Best Corp., parent of ABF Freight System, Fort Smith, Ark., reported fourth-quarter net income of $14.5 million on $1.396 billion revenue, compared with $9.5 million in earnings on $1.5 billion revenue in 2001. Fourth-quarter figures include a nonrecurring tax benefit of $1.9 million, the company said.
ABF earned $27.1 million in operating income in the fourth quarter on $344.9 million revenue, compared with $16.5 million in operating income on $302 million revenue in the year-ago period.
For the full year, ABF reported operating income of $68.8 million on $1.28 billion revenue, compared with $79.4 million in operating income on $1.28 billion revenue in 2001. ABF's OR was 94.6 last year, compared with 93.8 in 2001.
"ABF continued to produce good results with a fourth-quarter OR of 92.2," said ABC CEO Robert A. Young III. "Arkansas Best's solid performance during 2002 validated its position as the company with the strongest financial position in the long-haul, LTL industry."
ABF's fourth-quarter billed LTL revenue per hundredweight, excluding fuel surcharge, was $22.56, an increase of 5.9 percent over the fourth quarter 2001 figure of $21.30. "The closure of CF has strengthened overall pricing stability in our industry. ABF's ability to secure customer rate increases has improved. For example, in the fourth quarter of 2002, the average percent of rate increase obtained on deferred pricing agreements was better than that for any quarter since the third quarter of 2000 and was almost a full percentage point better than we saw in the fourth quarter of 2001," Young said.
"In an environment where a major competitor goes out of business, ABF's profitability and strong financial position have been advantages in the marketplace," Young said. "We've seen that value is even more important to our customers, and they are displaying a greater appreciation of financial stability in their transportation partners."
Young said it was "difficult to distinguish" the exact amount of business ABF has obtained directly from the CF closure. Additional factors, including the economic environment and the settlement of the longshoremen's West Coast labor dispute, also impacted ABF's fourth-quarter tonnage levels, he said.
"When business levels increase with customers ABF had prior to CF's closure, it is impossible to know which factor caused the change. Some of the additional freight that can be identified as coming from CF is not as profitable as ABF's average business. However, this business has contributed positively to ABF's margins because of the operating leverage that was available throughout the ABF network.
Con-Way Transportation Services, Ann Arbor, Mich., the nation's most profitable trucking group the past half dozen years, reported fourth-quarter operating income of $36.7 million on a 13.4 percent rise in revenue to $525.1 million, compared with year-ago operating income of $35.7 million on $463 million revenue. Gross operating margin deteriorated by 70 basis points to 93 percent, resulting in only slight 2.8 percent growth in operating income in the fourth quarter.
For the year, Con-Way reported $147.1 million in operating income on just over $2 billion revenue, compared with $157.5 million in operating income on $1.91 billion revenue for 2001.