Bad Times For Arkansas Best

By Stephen D. Simpson, CFA | April 26, 2011 AAA

While it is true that the industrial sector relies upon the transports to get their products to market, and that a recovery in the economy should be good for transports, that story has not played out so well in the trucking space. Although railroads like Union Pacific (NYSE:UNP) and Canadian National (NYSE:CNI) have shot up, many of the truckers are still down on a multi-year basis.

With very disappointing first quarter earnings, leading less-than-truckload (LTL) carrier Arkansas Best (Nasdaq:ABFS) is offering some evidence as to why that is. While demand for transport is definitely getting better, there is not much pricing power in the market and rising costs are becoming a larger problem. Of course, those investors with a contrarian streak might see this as an opportunity to pick up shares of a company that has generally been one of the better operators within its group. (For more, see Transport Stocks Ready To Roll.)

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Q1 Was Supposed to Be Bad, but Not This Bad
It says something about the operating environment in the trucking space that Arkansas Best missed what were already pretty uninspiring estimates. Oddly enough, the company did fine on the revenue line - revenue jumped almost 21% from last year and surpassed the average estimate. Even here, though, are signs of some of the challenges in the business - tonnage per day was up over 17% and there was a nearly 16% jump in shipments, but weight per shipment increased just 3% and revenue per hundredweight was up just a bit over 2%.

On the profitability side, though, things were pretty ugly. Wage costs jumped 11%, while fuel costs jumped more than 30% and purchased transportation costs were significantly higher as well. All in all, the company's operating ratio was still above 100 (meaning an operating loss), even though the ratio did improve from 110.7 a year ago to 105.6 this quarter. Still, the Street expected a much better improvement and Arkansas Best missed the average earnings target by $0.30 a share.

A Messy Operating Environment
It is probably a gross understatement to point out that Arkansas Best is dealing with a messy operating environment. On one hand, the company's unionized workforce gives the company a more experienced workforce with lower turnover than most of its non-union competitors. On the other hand, the company has to deal with a less competitive cost structure and has been pressing the Teamsters to match wage concessions that the union made to struggling rival trucker YRC Worldwide (Nasdaq:YRCW).

Fuel is also a problem. While Arkansas Best has a fuel surcharge mechanism in place, it is apparently not working as well as it should. What's more, higher fuel prices often push freight toward the rails and towards intermodal carriers like J.B. Hunt (Nasdaq:JBHT); that's not necessary such a strong factor in less-than-truckload shipping, but every bit counts.

Even with all that, pricing is still difficult. Companies with better - or more flexible - cost structures can compete with Arkansas Best on price and the fragmented nature of the market means that a lot of small carriers are willing to work for what amounts to peanuts. So, even with large carriers like Conway (NYSE:CNW), FedEx (NYSE:FDX) and UPS (NYSE: UPS) in the LTL market, pricing is an issue.

The Bottom Line
Arkansas Best has been a very good operator in the past, and that might encourage aggressive investors to take a chance on an eventual recovery here. The trouble is that there's nothing particularly proprietary about what Arkansas Best does - an up-and-coming rival like Old Dominion (Nasdaq:ODFL) uses the very same roads and so long as the shipments arrive on time and in good condition most customers are apt to think "trucking is trucking."

Still, Arkansas Best is trading at valuations that are about as low as they get for this name. Of course, so are Conway,
Knight (NYSE:KNX), Frozen Food Express (Nasdaq:FFEX) and other trucking names. Sooner or later this operating environment is going to start shaking out the weaker hands - if Arkansas Best is suffering, other operators are likely doing even worse and may not be able to stay in business. Hoping for a rebound in Arkansas Best or Frozen Food Express is a credible contrarian thesis, though growth-oriented investors may be more interested in a name like Old Dominion right now. (For more, see JB Hunt: The Trucking Company That Isn't.)

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