Shares of YRC Worldwide, Inc. (NASDAQ:YRCW) have rallied more than 70% in the last two sessions after the company posted earnings that showcased its first operating income in six years. BB&T immediately upgraded shares of the company, and if these operational improvements can continue then there would be great upside in shares of this company. However, I am still not sold that YRCW has the greatest upside in the transportation sector.
A Look at YRC Worldwide & its Lack of Transparency
I’m going to being by saying, YRC Worldwide, Inc. (NASDAQ:YRCW) is deserving of this rally. The company posted operating income of $2.40 million for the quarter, which reflected a mindboggling $58.5 million over last year’s Q1. The company’s CEO James Welch said a number of bullish statements including that there is still significant opportunity for improvements and defended the company’s $36.5 million liquidity decrease by pointing out its operational improvements and working capital management that provides “more than sufficient liquidity.” While it’s unknown when we may see another operating profit, the company’s $2.40 million is a start, and hopefully is a sign of what’s to come.
The company really didn’t answer any direct questions regarding future efficiency plans. It seemed as though answers to questions included those such as, “Well, I’d say, we’re just working on it every day,” and what seemed like a favorite from President Jeffery Rogers, “No. I really can’t comment about in-quarter stuff” and “I would just again, reiterate, it’s still rational. Let’s put it that way,” answering a question regarding concerns with second quarter capacity from Stifel, Nicolaus & Co.
I suppose my problem with YRC Worldwide, Inc. (NASDAQ:YRCW) is that the company is so large, with over $4.50 billion in annual revenue, and that it has made so many mistakes in the last few years, but really doesn’t address the key issues moving forward. However, after a long and tedious restructuring effort it is very possible that this is real change occurring before our eyes. When you consider over $4.50 billion in annual revenue and a market cap of just $120 million, there is a great deal of potential upside. Think about it this way, even if the company could create profit margins of just 0.50% it would create net income of almost $25 million, trading at just five times earnings, about 30% of the S&P 500 average. Thus the upside is massive “if” operational improvements continue!
My Choice for Best Value
I am not totally against an investment in YRC Worldwide, Inc. (NASDAQ:YRCW), but I believe it should be small and should not be the focal part of your investment portfolio. My largest single holding is XPO Logistics Inc (NYSE:XPO), and I still like it more than YRC Worldwide as a multi-year investment. I view XPO Logistics as the safer investment. Here are a few reasons that I like XPO more than YRC Worldwide right now.
XPO Logistics is growing at more than 100% year-over-year through acquisitions and cold starts. It has tripled revenue since Bradley Jacobs became the CEO and is still less than 1% of the $50 billion truck brokerage business. YRC Worldwide, Inc. (NASDAQ:YRCW) is losing revenue and commands a much larger piece of its U.S. sector.
In the 14 months prior to February 2013 XPO Logistics Inc (NYSE:XPO) has doubled its locations and has grown headcount from 200 to over 900. Meanwhile YRC Worldwide has laid off workforce and has closed branches of its business.
Lastly, Bradley Jacobs, the CEO of XPO Logistics, has built four multi-billion-dollar companies in his career, and from scratch. XPO Logistics was an established company that benefited from a $150 million investment from Jacobs, which then led to him taking over the board and becoming the CEO. He has hired an all-star team of executives and aims to turn XPO Logistics into a several billion dollar per year company in the next two to three years. The company has a lot of cash and the flexibility to move in any direction desired. YRC Worldwide does not have this luxury, nor does it have the executive star power. In a sense, YRC Worldwide is in survival mode while XPO Logistics Inc (NYSE:XPO) is in aggressive growth mode.
Conclusion
In my book, Taking Charge With Value Investing (McGraw-Hill, 2013) I discuss many levels of value, and for more speculative and riskier investments I say to seek “tons of revenue” relative to market capitalization and a company that has the means to improve efficiency. In many ways, YRC Worldwide, Inc. (NASDAQ:YRCW)meets the criteria, as I already explained that a very small 0.50% profit margin could lead to massive gains. However, I am not sold on whether it will be done, and I didn’t see enough optimism in a conference call that should have been exploding with excitement.
On the flip side, XPO Logistics Inc (NYSE:XPO) is cheap, and is projecting sales of more than $1 billion next year. When you consider 7% margins for when the company finally transitions from growth to efficient combined with an S&P 500 price/sales ratio of 1.50 you can see that XPO Logistics with a $300 million market cap is also cheap. In my opinion, the likelihood of XPO Logistics becoming a $2 billion company with a price over $100 is far greater than YRC Worldwide’s likelihood of reaching consistent profitability. For that reason, I believe XPO Logistics is the greatest value in the space.
Brian Nichols owns shares of XPO Logistics. The Motley Fool has no position in any of the stocks mentioned.
The article Identifying the Greatest Upside in the Transport Sector originally appeared on Fool.com and is written by Brian Nichols.
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