Is This Just an Influx of Money from Investors Who Know Nothing About Trucking?

Implications:   YRC Worldwide reported its second straight quarterly loss, a net loss of $45.9 million in the first quarter. Yet its stock surged nearly 30 percent on the day after those earnings were announced. What is the dichotomy here?

Analysis:   YRC Worldwide continued its downward slide with a reported loss of nearly $46 million in the first quarter as the nation's largest trucking company continues to struggle in the face of its high fixed terminal and personnel costs, a sluggish freight environment, higher costs and heavy discounting in the LTL sector.
  Yet, inexplicably, its stock surged nearly 30 percent on the day after the earnings announcement.
  What in the name of Jimmy Hoffa is going on here?
  To me, the stock surge is the result of ill-informed investors who know nothing about trucking except that it usually serves as a leading indicator of the overall economy. These investors are betting, perhaps correctly, that the economy has bottomed and demand for truck services is about to surge.
  Unfortunately, this flies in the face of data that is tougher to obtain for the average investor. Secondly, why invest in YRC, a troubled company? If one were dying to invest in trucking, there are several other higher-quality companies (J.B. Hunt, Con-way, Heartland Express, Knight Transportation, among them) who offer more diversified services at a lower fixed cost unit without the Teamsters overhang that YRC has.
  The first bit of evidence that shows we might not be at the bottom is the revised Truck Tonnage Index of the American Trucking Associations. It declined 3.3 percent in March, its largest one-month drop since August 2006 when the freight recession began. This comes after two straight monthly gains, indicating to me a shift downward in shipper demand.
  This coincides with negative full-year forecasts of freight demand by both UPS and FedEx, the largest players in the U.S. transportation market.
  Then there is YRC. Its stock jumped largely because one analyst at Morgan Keegan raised his rating on the stock from "underperform" to "market perform." Oh, wow.
  Other analysts were negative. Jon Langerfeld of R.W. Baird simply advised investors to "avoid this stock."
  That might be prudent. YRC, which lost 53 percent of its value last year, is beaten down, to be sure. But there may be more downside risk ahead.
  YRC lost 81 cents a share in the first quarter (62 cents after adjustments), way more than the Wall Street consensus of 25 cents a share. Interestingly enough, after saying it wasn't going to offer future guidance, it went ahead and forecast second-quarter earnings guidance of 30 to 40 cents a share in the second quarter.
  What? In the wake of the worse freight environment in at least 10 years when all truckers are facing record-high diesel costs, increased discounting (largely by YRC companies, Yellow and Roadway, and FedEx Freight), higher fixed costs and higher costs for borrowing, YRC thinks it can pull off a 92-cent swing in per-share earnings? In one quarter?
  Many of the smartest minds at rival trucking companies are whispering to each other, "I'll take the under on that one."
  The problems are multifold. First, YRC National suffered nearly a 9 percent tonnage decline in the first quarter, largely by its hurting customers in the retail sector. Even though higher fuel surcharges helped produce a 6.3 percent rise in yield, that still caused YRC National's adjusted operating ratio to tick up to 100.3, vs. year-ago's 97.5
  It's even worse at YRC Regional LTL. Because of its retrenchment and pulling back in some underperforming areas, YRC Regional had an adjusted OR of 105.6, vs. the year-ago's 99.7 This includes operations at the old USF Holland and New Penn units, which used to routinely report OR's in the low 80s when they operated before YRC's purchase in 2005.
  YRC also has a ton of debt, as indicated by its 42.8 debt-to-capitalization ratio. It recently renegotiated more than $1 billion of long-term debt, likely raising its annual debt costs up to $8 million.
  This has caused some analysts to slash their earnings estimates for YRC in light of their 1Q miss. David Ross of Stifel Nicholaus, for example, is cutting his full-year 2008 estimate for YRC from $1.35 a share to 65 cents, more than a 50 percent cut.
  YRC Chairman and CEO Bill Zollars says only he expects his regionals to be "profitable" in the second quarter. But with a reduced footprint in the regional business, and with discounting rampant at the national level, its hard to imagine they will be that profitable, given the overall environment current in the trucking sector.
  If one must buy trucking stocks, one would think there are better options available.