The recent Chapter 11 bankruptcy protection filing by less-than-truckload shipper Yellow has created an opportunity for other companies in the industry. Yellow, a major player in the LTL sector, operated a fleet of nearly 13,000 heavy-duty trucks. With its closure, other LTL peers like Old Dominion Freight Line, XPO, Saia, and ArcBest have the chance to benefit.
FedEx Ground, which also offers LTL services, currently operates around 25,000 heavy-duty trucks. As a diversified logistics provider, FedEx could absorb some of Yellow's freight. Investors have taken notice of this situation, driving up the stock prices of these LTL peers and FedEx by an average of 15% over the past month. In comparison, the overall S&P 500 index only experienced a 2% increase during the same period.
However, investors should exercise caution and be selective when considering investments in this sector. Monday saw Evercore ISI analyst Jonathan Chappell raise his price target for XPO shares to $72 from $56. One contributing factor to this upward revision was XPO's per-share earnings report of 71 cents, exceeding the market expectation of 61 cents. Chappell also noted the positive industry trends resulting from the likely liquidation of Yellow, stating that it bodes well for XPO. He currently rates XPO stock as Hold.
On the whole, Wall Street is slightly more bullish in its outlook, with 60% of analysts who cover XPO rating its shares as Buy. This figure surpasses the average Buy-rating ratio for stocks in the S&P 500, which stands at around 55%. The average analyst price target for XPO stock is approximately $74, while the shares were trading at $72.12 on Monday morning.
Similar sentiments are echoed for other LTL peers. Roughly 53% of analysts covering Saia stock rate the shares as Buy, and the average price target is about $441. Currently, the stock is trading at around $428. Though these numbers suggest limited upside potential, investors may find opportunities elsewhere within the LTL sector.
In-Depth Analysis of Trucking Companies
Old Dominion is rated as a Buy by approximately 29% of analysts. The average price target for the stock is around $411, which is slightly higher than its current trading price.
FedEx is a more diversified company compared to Old Dominion and Saia. Around 59% of analysts rate the shares as Buy, but the average price target is approximately $265, matching the stock's trading price.
ArcBest stands out from the rest with around 64% of analysts rating it as Buy. Its average price target of $136 suggests a potential gain of 17% from its current price of about $116.
Considering the companies' levels of indebtedness relative to their earnings is crucial, particularly in light of Yellow's downfall due to high debt and pension costs. FactSet data reveals that Yellow's total debt was about 5.6 times its earnings before interest, taxes, depreciation, and amortization (EBITDA) over the past 12 months. In comparison, the S&P 500's comparable figure is only about two times.
On the other hand, Old Dominion and Saia have minimal debt. ArcBest's debt ratio stands at a comfortable 1.1 times, while XPO and FedEx have higher ratios of three times and four times, respectively.
A healthy business often exhibits higher profit margins than its peers. Yellow generated an EBITDA profit margin of roughly 5% over the past 12 months. In contrast, ArcBest and FedEx have profit margins of approximately 8% and 11%, respectively. XPO reports an EBITDA profit margin of about 12%. Meanwhile, Saia and Old Dominion achieve exceptional profit margins of 22% and 34%, respectively.
Although ArcBest appears favorable based on current price targets, there is a possibility for increased optimism in the sector as a whole. Price targets for other companies may rise as Wall Street continues to evaluate the implications of Yellow's difficulties.