RBC Capital is upgrading Con-Way (NYSE:CNW) to Outperform from Sector Perform while raising their target to $44 (prev. $38).
- While the LTL space still has a long road to hoe with regards to solving its excess capacity dilemma, fundamentals have begun to materially improve.
- During the 1Q'10 earnings season, most LTL carriers reported y/y tonnage improvements in each month of the quarter with these trends significantly accelerating in March and April, a trend that continued into May.
- RBC believes that the company's operating losses are in its rearview mirror. Management has been vocal of late stating that volumes were up 37% y/y in April and up 30% y/y so far in May. Additionally, management has stated that it was profitable in April.
- Recent channel checks confirm their belief that the industry as a whole has found religion with regards to taking freight rates higher. They believe that CNW is beginning to gain traction with regards to price and will begin to see y/y yield improvement as it works through contract negotiations this bid season.
- CNW has a material amount of operating leverage in its model and once this re-priced freight begins to trickle in RBC believes the carrier could see some significant upside to estimates. Remember, the company is already absorbing the cost of running a much larger network and can handle a significant increase in volumes without layering in a material amount of expense.
The recent pullback in the stock price has provided a much more attractive entry point into the name. Given the magnitude of operating leverage in the LTL business model coupled with the improving macro environment, they believe now is the time to layer on more aggressive LTL exposure, thus their upgrade of CNW to go along with their previous Outperform rating on Old Dominion Freight Line (ODFL).
All in, RBC believes that the company has weathered the storm and that it stands to be one of the few standouts in the LTL space once the recovery is in full swing. Most compelling is the fact that CNW has a lot of operating leverage in its model and once its re-priced freight begins to trickle in they believe the carrier could generate some significant upside to estimates. Remember, the company is already absorbing the cost of running a much larger network and can handle a significant increase in volumes without layering in a material amount of expense. With that said, they do caution that recovery in the LTL space could take time as a significant amount of excess capacity exists. However, they believe that CNW has taken the necessary measures to position itself better than most in the LTL space and will likely be rewarded quicker than most once a more robust recovery commences. With that said, RBC reminds investors that the time to own these names is well ahead of a recovery.
Notablecalls: Gutsy upgrade by RBC's team as this is a very economically sensitive sector.
The stock, CNW is prone to big swings on analyst rating changes so I would not be surprised CNW trade to $34 kind if the market doesn't fall apart on us again.
I think the whole space was held back yesterday following the carnage in Arkansas Best (ABFS) - see below.