Legendary investor Warren Buffet lists three questions to ask yourself when picking a company to invest in:
- Do you understand the business?
- Do you like/trust the management?
- Is the valuation attractive?
Here is an interesting one. A company with nearly 5 billion in revenue, EBITDA of 280 million and trading at roughly 80 million. We see it as a potential 5 bagger. And we have already done this trade in January last year from 3.00 to 8.00. Nearly 200%. Not too shabby and we think it will happen again. We issue a sell on our last call for CAI at 23$ with today's price of $29, and suggest a LONG position in YRCW.
$YRCW is one of the largest LTL trucking companies in the US. In fact its revenue overshadows ODFL, which is trading 200 times higher in terms of market cap.
YRC has long been a topic of debate in the industry and we know a thing or two about it. When I was younger, my father and I owned a small trucking company in Toronto, Canada. Not an easy business to be in, especially if you start it from scratch without having some significant capital to fund the first 6 months of operations as average invoices are paid on an average of 60 days.
YRC operates in nearly every town in the US and has a few regional divisions on top of its federal operator YRC Freight. That company nearly went bankrupt in 2008 during the financial crisis as it has just purchased one of its competitors and added some hefty leverage to its balance sheet. Since then, the new management team has done a great job to delever and paid back 2/3 of its debt. Not without help from the top. YRCW is a unionized carrier looked after by the Teamsters. If you haven't heard of them, just watch The Irishman on Netflix. Teamsters make YRCs life very difficult as does any workers union. Recently the company re-signed a five year labor agreement with the union and had to add 5$ per hour to every unionized workers salary (increments of $1 per year), which of course hit its bottom line. Nevertheless, the agreement didn't come without perks for the company. For example, regional clients can now be served by any division of the company, instead of having to the served by that particular regional segment of the holding. Other perks allowed management to begin a multi-year optimization program and they've started with division management consolidation. Last quarter report showed just 8 million dollar loss with a roughly 20 million dollar improvement quarter over quarter. Optimization and consolidation will cover the increase in salaries and then leave some for the shareholder.
On top of the union agreement the company has just completely refinanced all of its debt, pushing it back another 3 years and lowering interest by 1%. Also previous loan arrangements had some covenants to keep by, such as a debt to EBITDA ratio that had to be met. None of that anymore. What a sigh of relief.
However, there is a huge elephant in the room, which eliminates any talk of M&A at depressed prices - pension obligations! And not just their own. Many decades ago, companies in the US were unionized and they all shared a "multiemployer pension" plan, where one of the then 700 companies went bankrupt, the other would cover pensions for its employees. Well... only 2 of them left and now they share pension obligations for all of those companies who no longer exist, or has gotten rid of its unions. However, YRCW does not have to pay out these billions of dollars that accumulated but it has the number hanging over its head as a "soft obligation" due to the legislation change in 2014. This exact legislation may have this liability forgiven completely in the coming years.
Now let's take a look at its number one competitor, the industry sweetheart, Old Dominion Freightlines, whom, as I mentioned is valued at 200 times of YRCW at the moment. ODFL doesn't have to deal with a lot of things that unions bring upon a business. I'm hearing that they don't even pay for overtime. Try that in a Teamsters house, see how far you'd get. On the other hand having Teamsters there is a sort of a cushion. If times get really rough, Temasters has proven to be the helping hand, allowing the company to lower wages and maybe even support the company with a new loan if need be. Many investor undermine this fact.
We believe that YRC is a great turnaround story that is unfolding before our eyes in what seems to be a difficult time for truckers thanks to Trumps tariffs and a significant drop in imports in the second half of 2019. Darren Hawkins,the CEO, is doing an excellent job turning around a unionized trucking company and he's hitting it in all the right directions. I've met with Darren in New York in July 2019, although our dialogue was covered by counsel on each side, I felt like Darren was a very genuine guy, who's given a very hard job and is doing his best. He explained to us, that the perks given by union in the latest agreement are somewhat of a holy grail for the company and we saw that in the operating results in Q3 (a significant improvement in Operating Ratios). Recently, the company's financial department saw a change in leadership, where Fisher was replaced by Pierson as CFO. Those who know the history of the company will know that Pierson led an impressive turnaround in 2011-2014 leading the company from hundreds of millions in losses to small but significant profits.
At this point, the company and its stock is one positive earnings surprise away from changing the whole narrative on a never ending decline. We believe that the company is terribly undervalued and have a target of 17 per share, which will give it a 550 million valuation, again compared to ODFL 15 billion dollar market cap.
