Con-way Secondary Offering: Don’t Back Up the Truck

Trucking and logistics firm Con-way (CNW) announced a substantial secondary offering last night, and understandably the market sent shares lower as a result. Con-way has commenced an offering of 4.3 million shares, and the allotment could run as high as nearly 5 million shares if underwriters (MS and GS) take advantage of their options to purchase. Coming into the day, we show the company as having 49.5 million shares outstanding, so this would be around 10% dilutive to current shareholders. The company did not disclose specifics in its press release, only mentioning that the capital would be used for general corporate purposes and capital expenditures.

According to Barron’s, the secondary offering is not sitting well with at least one analyst. Bank of America/Merrill Lynch’s Ken Hoexter has downgraded the shares to “Neutral” from “Buy” and has also lowered his target from $42 to $39. His take is that it is the wrong time to expand their “less than truckload” fleet because of excess capacity. Furthermore, it is unimpressive that the company is not able to finance these expenditures through its own cash flow.

At Ockham, we have held an Overvalued stance on CNW for nearly a year now because we have been less than inspired by the company’s fundamentals. Revenue is growing by double digits yet they are still not expected to top 2008 levels this year. Also, earnings per share are expected to show strong growth this year, but that is compared to last year’s extreme weakness. The stock trades at more than 32x this fiscal year’s earnings, and that is before the dilution begins to depress earnings per share calculations.

So, the fundamentals are improving, but not fast enough to justify the stock’s current valuation. Furthermore, this secondary offering will give them the capital to pursue growth strategies but it comes at the expense of current shareholders. If “less than truckload” shipping booms in the years ahead, they will come out looking like geniuses, but from what we can tell surely investors can find better value elsewhere.

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