We initiate coverage for YRC Worldwide Inc. (YRCW) with a Neutral recommendation, which means the stock will perform mostly in line with the broader market. Net earnings in the second quarter 2010 were significantly above the Zacks Consensus Estimate but revenue fell below it. Although YRC Worldwide reported signs of some revival, we still believe that the company continues to face the threat of bankruptcy.
YRC Worldwide is facing major challenges including sustaining liquidity, dilution of preferred stock, loss of customers and a weak LTL market. The company is trying to deter total financial collapse in every possible way. Despite prudent moves to manage liquidity we believe YRC Worldwide will continue to need cash for operations.
During the second quarter 2010, YRC Worldwide saved $85 million in pension-related expenses. In January 2011, the company’s pension liability will escalate to more than $300 million. Management desperately needs to renegotiate the agreement with the union failing which the company will face a severe liquidity crisis.
During the past one year, YRC Worldwide securitized a portion of its outstanding debt by issuing 1.2 billion common shares. This massive increase in the total number of outstanding shares significantly reduces the company’s stock price. YRC Worldwide has decided to conduct a reverse stock-split, but is yet to decide the magnitude and date.
Nevertheless, recent measures like debt-to-equity exchange and divestment of YRC’s Logistic businesses may become beneficial for the company. According to our view, YRC Worldwide’s viability depends on its ability to become profitable but unfortunately we do not expect the company to reach that stage any time soon.