Tuesday, May 25, 2010

Arkansas Best (NASDAQ:ABFS): Concessions Voted Down - What's Next for ABF?

Several firms are out very negative on Arkansas Best (NASDAQ:ABFS) this morning after Teamsters at ABF Freight, Arkansas Best Corp.’s LTL division (93% of the company’s revenues), rejected a plan that called for 15% wage cuts but included an earnings plus plan that would have made them nearly whole as the company returned to profitability (vote was 3,764-2,936, with 80% member participation).

- Merrill Lynch/Bac is downgrading ABFS to Underperform from Neutral with a $24 price target (prev. $35) saying this is a shocking move, in their view, given the near death spiral that high Teamster wages put YRC Worldwide in over the past year, and given Arkansas Best’s 6 consecutive quarters of earnings losses with a 6-quarter cumulative free cash flow loss of $123 million. With subsequent cuts, including a 15% wage cut and suspended pension payments, YRC was able to reduce its operating costs, leaving Arkansas Best with the highest cost structure in the LTL industry. The vote rejection ensures that its non-flexible cost structure continues.

- Baird is lowering their target to $26 from $28 while maintaining Underperform rating on ABFS noting the proposed wage concessions and structural pay change was significant, would have resulted in nearly $70 million in annual savings or $1.80/share. The proposed variable pay structure tied to operating profit would have been ground breaking.

ABFS remains unprofitable, so what is next? Pricing and legislative pension relief are the two major potential changes on the horizon that could help ABFS move toward profitability. Baird believes the change in industry pricing has more near-term opportunity than pension relief.

- Stifel is reiterating their Sell rating noting they believe the employees rejected the concessions for many different reasons, right or wrong, including the following. 1) some think management had not exhausted enough cost-cutting options before asking the employees to take significant cuts, 2) some worry that lower wages will lead to more aggressive ABF pricing to gain more volume [even though that is uncharacteristic of historically price disciplined ABF], 3) others feel the concessions were thrown at them without input from
employees and little push-back from their union representatives, 4) some see ABF's $138mm net cash (balance sheet) position and believe the company should have to burn through those funds before asking for any money from its workers.

What now? Stifel believes the company will reconvene with Teamsters leadership to try and work out some other wage reduction proposal; however, it is unclear what concessions, if any, would be agreeable to the members. Even when YRC workers were threatened the company would likely not survive the year if they voted NO, the second round of concessions in August 2009 only passed by a 58%/42% margin. ABF workers do not have the same immediate threat of closure.

ABF is in a tough spot, in their view, because the company was prudent to build a cash war chest going into the great freight recession but now has higher relative labor costs, as a result of YRC's multiple concessions and bailouts, and a difficult time arguing that it needs money from its employees.

They are maintaining their Sell rating on the shares of ABF, as a lack of earnings forecast for the next several quarters, a potential re-vote and/or redraft of the concession agreement and uncertainty surrounding YRC's long-term viability and pension bailout could lead the stock to drop to approximately $19 (tangible book value) this year.

Notablecalls: This one's heading to the slaughterhouse today. Stifel is calling for $19/share this year, so I think $23/sh level is where it's headed here.

The company will reconvene with Teamsters leadership & likely iron out a deal at some point but it's not likely to be a good one.

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