Arkansas Best Corporation - A Wax Ink Raw Value Report
How It Got Here
Financial information contained in this report is based on the company's Form 10-K filing for fiscal year ending December 31, 2008, as filed with the Securities and Exchange Commission on February 20, 2009.
Arkansas Best Corporation (Nasdaq: ABFS), a Delaware corporation, is a holding company engaged through its subsidiaries primarily in motor carrier freight transportation. The company’s principal operations are conducted through ABF Freight System, Inc. and other affiliated subsidiaries of the company.
Headquartered in Fort Smith, Arkansas, ABF is the largest subsidiary of the company, accounting for 96% of the company’s consolidated revenues for 2008. The company is one of North America’s largest LTL motor carriers, providing direct service to more than 98% of U.S. cities having a population of 30,000 or more, as well as interstate and intrastate direct service to more than 41,000 communities through 286 service centers in all 50 states, Canada, Guam, Puerto Rico and the U.S. Virgin Islands.
Through arrangements with trucking companies in Mexico, the company provides motor carrier services to customers in that country as well.
The company was publicly owned from 1966 until 1988, when it was acquired in a leveraged buyout by a corporation organized by Kelso & Company, L.P. In 1992 the company completed a public offering of its common stock, par value $.01. The company also repurchased substantially all of the remaining shares of common stock beneficially owned by Kelso, thus ending Kelso’s investment in the company.
In 1993 the company completed a public offering of 1,495,000 shares of $2.875 Series A Cumulative Convertible Exchangeable Preferred Stock. The company’s Preferred Stock was traded on The Nasdaq National Market under the symbol “ABFSP.” On July 10, 2000, the company purchased 105,000 shares of its Preferred Stock at $37.375 per share, for a total cost of $3.9 million. All of the shares purchased were retired.
On August 13, 2001, the company announced the call for redemption of the 1,390,000 shares of Preferred Stock that remained outstanding. At the end of the extended redemption period on September 14, 2001, 1,382,650 shares of the Preferred Stock were converted to 3,511,439 shares of Common Stock.
The remaining 7,350 shares of Preferred Stock were redeemed at the redemption price of $50.58 per share for a total cost of $0.4 million. The companydelisted its Preferred Stock from trading on The Nasdaq National Market on September 12, 2001.
In 1995, pursuant to a tender offer, a wholly owned subsidiary of the company purchased the outstanding shares of common stock ofWorldWay Corporation, for a total purchase price of approximately $76.0 million. WorldWay was a publicly held company engaged through its subsidiaries in motor carrier freight transportation.
In 1999, the company acquired 2,457,000 shares of Treadco, Inc. common stock for $23.7 million via a cash tender offer pursuant to a definitive merger agreement. As a result of the transaction, Treadco became a wholly owned subsidiary of the company. On September 13, 2000, Treadco entered into a joint venture agreement with The Goodyear Tire and Rubber Company, Inc. (NYSE: GT) to contribute its business to a new limited liability company called Wingfoot Commercial Tire Systems, LLC. On April 28, 2003, the company sold its 19.0% ownership interest in Wingfoot to Goodyear for $71.3 million.
In 2001, the company sold the stock of G.I. Trucking Company, a wholly owned subsidiary of the company acquired as part of the WorldWay transaction, for $40.5 million to a company formed by the senior executives of G.I. Trucking Company and Estes Express Lines.
In 2003, Clipper Exxpress Company, a wholly owned subsidiary of the company acquired in 1994, sold all customer and vendor lists related to Clipper’s less-than-truckload (LTL) freight business to Hercules Forwarding, Inc. of Vernon, California, for $2.7 million. With this sale, Clipper exited the LTL business.
On June 15, 2006, the company sold Clipper to a division of Wheels Group for $21.5 million. With this sale, the company exited theintermodal transportation business.
The company offers national, inter-regional and regional transportation of general commodities through standard, expedited and guaranteedLTL services. General commodities include all freight except hazardous waste, dangerous explosives, commodities of exceptionally high value and commodities in bulk. The company’s shipments of general commodities differ from shipments of bulk raw materials, which are commonly transported by railroad, truckload tank car, pipeline and water carrier.
General commodities transported by the company include, among other things, food, textiles, apparel, furniture, appliances, chemicals,non-bulk petroleum products, rubber, plastics, metal and metal products, wood, glass, automotive parts, machinery and miscellaneous manufactured products.
During the year ended December 31, 2008, no single customer accounted for more than 3.0% of company revenues, while the ten largest customers accounted for 7.2% of company revenues.
LTL Motor Carrier Operations
The company’s LTL (Less-Than-Truckload) motor carrier operations are conducted through ABF; ABF Freight System (B.C.), Ltd.; ABF Freight System Canada, Ltd.; ABF Cartage, Inc.; and Land-Marine Cargo, Inc.
LTL carriers service shipping customers by transporting a wide variety of large and small shipments to geographically dispersed destinations. Typically, shipments are picked up at customers’ places of business and consolidated at a local terminal. Shipments are consolidated by destination for transportation by intercity units to their destination cities or to distribution centers. At distribution centers, shipments from various terminals can be reconsolidated for other distribution centers or, more typically, local terminals.
Once delivered to a local terminal, a shipment is delivered to the customer by local trucks operating from the terminal. In some cases, when one large shipment or a sufficient number of different shipments at one origin terminal are going to a common destination, they can be combined to make a full trailer load. A trailer is then dispatched to that destination without rehandling.
In addition to the traditional long-haul model, the company has implemented a regional network to facilitate its customers’ next-day and second-day delivery needs.
Development and expansion of the regional network required added labor flexibility, strategically positioned freight exchange points and increased door capacity at a number of key locations.
Through a multi-phased program, ABF’s regional network now covers the eastern two-thirds of the United States. Marketing of the regional initiative was initiated in August 2006 in the East Coast states and in January 2007 in the South and Central regions. Further operational changes, which were implemented in August 2008 and marketed beginning in September 2008, reduced transit times in the regional network and in certain of ABF’s long-haul lanes.
The expansion of the regional network to the Western region of the United States may be implemented in 2009.
Competition, Pricing and Industry Factors
The trucking industry is highly competitive. The company’s LTL motor carrier subsidiaries actively compete for freight business with other national, regional and local motor carriers and, to a lesser extent, with private carriage, freight forwarders, railroads and airlines. Competition is based primarily on personal relationships, price and service.
Competition for freight revenue, however, has resulted in discounting which effectively reduces prices paid by shippers. In an effort to maintain and improve its market share, the company’s LTL motor carrier subsidiaries offer and negotiate various discounts.
The company charges a fuel surcharge based upon changes in diesel fuel prices compared to a national index. Throughout 2008, the fuel surcharge mechanism continued to have strong market acceptance among their customers, although certain nonstandard arrangements with some of the company’s customers have limited the amount of fuel surcharge recovered.
The trucking industry, including the company’s LTL motor carrier subsidiaries, is directly affected by the state of the residential and commercial construction, manufacturing and retail sectors of the North American economy. The trucking industry faces rising costs including government regulations on safety, equipment design and maintenance, driver utilization and fuel economy. The trucking industry is dependent upon the availability of adequate fuel supplies.
The company has not experienced a lack of available fuel but could be adversely impacted if a fuel shortage were to develop. In addition, seasonal fluctuations also affect tonnage to be transported. Freight shipments, operating costs and earnings also are affected adversely by inclement weather conditions.
The company competes with nonunion and union LTL carriers. Competitors include YRC Worldwide, Inc. (Nasdaq: YRCW), FedEx Corporation (NYSE: FDX), United Parcel Service, Inc. (NYSE: UPS), Con-Way, Inc. (NYSE; CNW), Old Dominion Freight Line, Inc. (Nasdaq: ODFl), SAIA, Inc. (Nasdaq: SAIA), and a Canadian company, Vitran Corporation, Inc. (Nasdaq: VTNC).
The final hours of service rules regulating driving time for commercial truck drivers, announced by the U.S. Department of Transportation (“DOT”) in April 2003, became effective in January 2009. The rules, which were implemented by the company in January 2004, allow a driver to drive up to 11 hours within a 14-hour nonextendable window from the start of the workday, following at least 10 consecutive hours off duty. The hours of service rules have been challenged in federal court, and future modifications to the rules, if any, may impact the company’s operating practices.
The operational impact of these rules on the company's over-the-road line haul relay network has been to provide modest opportunity to increase driver and equipment utilization and improve transit times. The rules also have allowed LTL carriers, such as ABF, to adjust their over-the-road line haul relay network to take advantage of the 11 hours of drive time during a tour of duty.
Impacts on the truckload industry have included a decline in driver utilization and flexibility and, as a result, truckload carriers have increased charges for stop-off and detention services, making LTL carriers somewhat more competitive on many larger shipments.
Insurance, Safety and Security
Generally, claims exposure in the motor carrier industry consists of cargo loss and damage, third-party casualty and workers’ compensation. The company’s motor carrier subsidiaries are effectively self-insured for the first $1.0 million of each cargo loss, $1.0 million of each workers’ compensation loss and generally $1.0 million of each third-party casualty loss. The company maintains insurance which it believes is adequate to cover losses in excess of such self-insured amounts.
However, the company has experienced situations where excess insurance carriers have become insolvent. The company pays assessments and fees to state guaranty funds in states where it has workers’ compensation self-insurance authority. In some of these states, depending on each state’s rules, the guaranty funds may pay excess claims if the insurer cannot due to insolvency.
There can be no certainty of the solvency of individual state guaranty funds. The company has been able to obtain what it believes to be adequate coverage for 2009 and is not aware of problems in the foreseeable future which would significantly impair its ability to obtain adequate coverage at market rates for its motor carrier operations.
Since 2001, the company has been subject to cargo security and transportation regulations issued by the Transportation Security Administration. Since 2002, the company has been subject to regulations issued by the Department of Homeland Security. The company is not able to accurately predict how past or future events
will affect government regulations and/or the transportation industry, and believes that any additional security measures that may be required by future regulations could result in additional costs; however, other carriers would be similarly affected.
As of December 31, 2008, athe company had a total of 10,512 active employees. Employee compensation and related costs are the largest components of the company’s operating expenses. In 2008, such costs amounted to approximately 60% of company revenues. Approximately 75% of the company’s employees are covered under a collective bargaining agreement with the International Brotherhood of Teamsters.
The company’s current five-year agreement with the International Brotherhood of Teamsters expires on March 31, 2013, with the current agreement providing for compounded annual contractual wage and benefit increases of approximately 4%, subject to wage rate cost-of-living adjustments, which includes company contributions to various multi-employer plans maintained for the benefit of employees who are members of the International Brotherhood of Teamsters.
Amendments to the Employee Retirement Income Security Act of 1974 (“ERISA”), pursuant to the Multi-employer Pension Plan Amendments Act of 1980 (the “MPPA Act”), substantially expanded the potential liabilities of employers who participate in such plans. Under ERISA, as amended by the MPPA Act, an employer who contributes to a multi-employer pension plan and the members of such employer’s controlled group are jointly and severally liable for their share of the plan’s unfunded vested liabilities in the event the employer ceases to have an obligation to contribute to the plan or substantially reduces its contributions to the plan, in the event of plan termination or withdrawal by the company from the multi-employer plans for example.
Three of the largest LTL carriers are unionized and generally pay comparable amounts for wages and benefits. However, certain unionized competitors of the company were recently granted wage concessions which could effectively lower their cost structures beginning in 2009 and as a result may potentially increase pricing competition in the LTL market.
Union companies typically have similar wage costs and significantly higher fringe benefit costs compared to nonunion companies. The Company believes that union companies also experience lower employee turnover, higher productivity, lower loss and damage claims and lower accident rates compared to some non-union firms.
Due to its national reputation, its working conditions and its wages and benefits, the company has not historically experienced any significant long-term difficulty in attracting or retaining qualified employees, although short-term difficulties have been encountered in certain situations.
The stock is on the Wax Ink watch list, with a Reasonable Value Estimate of $102, a Buy Target of $51, a First Sell Target of $99, and a Close Target of $107. Going forward, we are projecting an approximate 60% decline in our Reasonable Value Estimate for 2009 based on a projected decline in Net Operating Profits.
With a recent close of $26.57, the stock is currently carrying a PE of 5.89 based on the $4.51 per share in earnings the company generated in 2008.
In addition to keeping Debt low at $0.66 per share and Cash at a reasonable level of $3.99 per share, management was able to generate a Return On Invested Capital of more than 23%, increase Free Cash Flow to $5.22 per share, and maintain Sharehold Equity at close to $25 per share, while keeping Tangible Book Value at just above $22.
In our opinion, these are outstanding achievements for which management should be commended, especially when considering that the economy during the last four months of 2008 went straight into the proverbial crapper.
While be believe that a reasonable entry point for this stock is at or about $39, we are also aware that the general economy is still near collapse. We do not believe for one second, what the Federal Reserve and the Treasury Secretary are saying, that the economy is "on the mend".
Instead, we believe that the economy will not start to improve until sometime in mid to late 2011.
Admittedly, there will be bull runs amid the current bear market, but we are anticipating that over the coming months, new lows will be tested in the general markets and as such, it is our feeling that a more reasonable entry point for this stock is between $19 and $21.
Arkansas Best Corporation Worksheet 1208