YRC Worldwide Remains Neutral

We reaffirm our long-term Neutral recommendation on YRC Worldwide Inc. (YRCW), which signifies that the stock will perform almost in line with the broader market. YRC Worldwide outperforms the Zacks Consensus Estimates in the fourth quarter of 2010.I n the reported quarter, YRC Worldwide improved several financial and operating metrics. Consolidated operating expense was $1,118.4 million, down 2% year over year. Consolidated operating ratio in the reported quarter was 101.7% compared with 108.2% in the prior-year quarter. Adjusted EBITDA was $38.7 million compared with a negative $16.5 million in the year-ago quarter.

Improvement in the U.S. economy resulted in higher tonnage moved by the truckers. This favorable macro economic condition will further boost YRC Worldwide’s financials going forward. According to the American Truck Association, January 2011 has witnessed a strong gain in truck freight volume despite of severe winter storm. For fiscal 2010, freight tonnage was up 5.7% year over year while for January 2011, freight tonnage was up nearly 8%. In synergy with this favorable trend, YRC Worldwide is regaining many of its clients, who are lost during the recessionary periods.

On the other side, we believe near-term possibility of bankruptcy still persist for YRC Worldwide.The company’s viability depends on its ability to become profitable but unfortunately we do not expect the company to reach that stage any time soon.Trucking industry remains a highly competitive one. YRC Worldwide is gradually loosing market share to its competitors Arkansas Best Corp. (ABFS), Con-way Inc. (CNW) and Knight Transportation Inc. (KNX).

Recently, YRC Worldwide has entered into a deal with its creditors and labor union Teamsters Brotherhood to restructure its sagging finances. The lenders will inject fresh capital in return of equity capital and convertible debts. This will significantly dilute the wealth of existing shareholders. Immediately after this announcement, Fitch Ratings announced that it could downgrade the company’s credit ratings as the rating agency considers the whole restructuring process as coercive debt exchange leading to ultimate loss for the investors.

As per Fitch, they placed YRC Worldwide’s issuer default rating (CC), secured bank credit facility rating (B-/RR2) and senior unsecured rating (C/RR6) on “negative rating watch”. If the deal matures, Fitch rating could downgrade the company’s issuer default rating from “CC” to “RD” indicating highly speculative and junk category.

YRC WORLDWD INC (YRCW): Free Stock Analysis Report

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