ODFL - Old Dominion And XPO: The Outlook For Trucking Stocks Amid Yellow's Bankruptcy

2023-08-18 11:40:17 ET

Summary

• Yellow Corporation, a logistics company, has filed for bankruptcy and will wind down its operations, resulting in the loss of around 30,000 American jobs.
• Old Dominion Freight Line and XPO Inc. are well-positioned to benefit from Yellow's bankruptcy and can capitalize on the opportunity to expand their market share.
• Old Dominion Freight Line, with its similar network and history of market share growth, is in a better position to acquire Yellow's assets and create value for shareholders.

On August 6th of this year, the management team at logistics company Yellow Corporation ( YELLQ ) announced that, after nearly 100 years in operation, the company was filing for bankruptcy protection. Unlike many instances of bankruptcy that involve some form of reorganization, Yellow elected to start winding down its operations, resulting in around 30,000 American jobs eventually being lost and a well-established player in a highly competitive market shuttering its doors. While this does represent, very likely, a complete loss for the company and its shareholders, it does open up opportunities for other players in this space. It is my contention that both Old Dominion Freight Line ( ODFL ) and XPO Inc. ( XPO ) stand to benefit from this development. Though I would definitely argue that the former of these two is far better positioned to capitalize on this once-in-a-century opportunity.

A lot is up for grabs

According to the press release issued by Yellow, the company was essentially forced into bankruptcy because of conflicts between it and the International Brotherhood of Teamsters union. The way the company told the story, the union made it all but impossible for the enterprise to continue making necessary changes to its operations in order to be competitive moving forward. Whatever the truth behind the matter might be at this point is probably irrelevant. What we do know, however, is that Yellow, using DIP (debtors-in-possession) financing, continues to operate, but only until it can appropriately market and sell off its assets.

Even though the company itself was fairly small compared to the broader economy, it was a rather sizable player in its space. According to management, the business operated the second-largest LTL (less-than-truckload) network throughout North America. For those who don't know, LTL logistics companies operate in a way that allows multiple shippers to send their freight on the same trailer rather than having a single company's freight dedicated to an individual trailer. This is an important niche in the logistics market because it makes possible the transportation of quantities of goods that are fairly small by comparison to what other companies might ship.

In addition to being the second-largest player in this space as measured by network size, Yellow described itself as being the second-largest trucking company on the continent. It generated $5.2 billion in revenue in 2022 by facilitating 14.2 million shipments. In addition to operating 308 terminals, the company had around 12,700 tractors and 42,000 trailers. This massive network of assets was powered by roughly 30,000 employees. As you can see in the image above, the company truly did span not only the 48 contiguous US states, it also had operations throughout parts of Canada and Mexico.

Management had been working hard on a program called Yellow One that aimed to significantly improve operations. This largely centered around optimizing the company's network so that it was able to cut down on the distance that trucks traveled. What this does suggest is that not only does the company have a massive asset base that could be incredibly valuable to some other firm. It also understood very clearly how inefficient its business model was. This just screams opportunity for some other player that is more financially stable to come into the picture, pick up those assets, follow through with the aforementioned plan (obviously making adjustments for existing assets that the acquirer already owns), and create significant value for shareholders.

Where other trucking firms might win

I do believe that almost any company in this space stands to benefit from this wreckage. But the two companies I would like to focus on most are Old Dominion Freight Line and XPO Inc. The reason for this emphasis is that both firms are almost entirely dedicated to LTL services. First, I would talk about Old Dominion Freight Line before ultimately moving into a discussion of why XPO Inc. could benefit, but not to the extent that its competitor could.

The first thing I would like to point you to is the image above. This is a map that shows the US operations of Old Dominion Freight Line. The company has 256 service centers spread across 48 states. As of the end of the most recent quarter, it had 11,452 tractors with 46,011 trailers and, with a 12% market share, was the second-largest LTL operator in the nation. What is very interesting about the map is that it mirrors, very closely, Yellow's US map. This is a major positive because it means that in every market in which Yellow ceases to exist, Old Dominion Freight Line captures not only a greater market share, but also likely achieves greater supplier power that should result in more impressive margins.

Simultaneous with this thought is the thought that there could be attractive synergies from one asset base to another. Picking up facilities that are currently owned by Yellow in key markets in which Old Dominion Freight Line either falls short or does not have as large of a market share as it would like, could lead to significant benefits. The strategy I have in mind here is referred to as 'clustering' and it essentially allows a business with assets that are geographically close to one another to piggyback off of the proximity of those assets. If we were talking about a funeral home operator, for instance, sharing the same hearse between two geographically close funeral homes would make the operation more efficient and more profitable. The same strategy can apply to any asset-intensive business.

Another really important point is that, unlike many of its peers, Old Dominion Freight Line has a history of grabbing additional market share. Back in 2012, the company had only 218 service centers. That number grew to 255 by the end of 2022. This allowed the total shipments per day to climb roughly 75% from 29,327 to 51,341. Over that same window of time, Yellow reported a decline in its number of service centers from 419 to 308, while shipments per day dropped from 86,480 to 54,863. Even the other company that we are talking about in this article, XPO Inc., saw a decline from 303 service centers to 294. That was instrumental in the number of shipments per day that the company facilitated dropping from 58,595 to 49,257.

By investing heavily in growth initiatives, the management team of Old Dominion Freight Line was successful in growing the company's market share amongst the top 25 largest LTL carriers from 2.9% in 2002 to 11.8% in 2022. This can be seen in the image above. As you can see in the second image above, its market share has improved significantly in each of the regions in which it operates. With this kind of track record, management is certain to take an interest in any cheap assets that it can pick up.

Outside of the market share growth, there's also the fact that the company has a fantastic operating history. From 2020 to 2022 , revenue for the company grew from $4.02 billion to $6.26 billion. As you can see in the chart above, other important metrics, such as those regarding profitability, also improved. We have seen some weakness in the current fiscal year. Revenue dropped from $3.17 billion in the first half of 2022 to $2.86 billion in the first half of 2023. All three major profitability metrics of the company also declined. According to management, this pain was the result of a 13% drop in the amount of tons transported. Shipments per day dropped by 10.6%, while revenue per hundredweight increased by only 3.8%. This pain was driven by difficult macroeconomic conditions.

Despite those issues, the company remains in strong financial shape. It actually has only about $80 million of debt on its books. And it has $55.1 million in cash and cash equivalents, leaving it only $24.9 million in net debt. Management could easily take on hundreds of millions of dollars of debt in order to buy up whatever assets it finds most appealing.

There could also be some opportunities here for a company like XPO Inc. While the company does still have operations in Europe, its North American business is the bulk of the business, and it is entirely dedicated to the LTL space. This was not always the case. For instance, in November of last year, the company completed the spinoff of RXO Inc. (RXO), a technology-enabled brokered transportation platform that is now its own standalone publicly traded enterprise.

According to management, the company boasts a roughly 8% market share throughout North America for the LTL space. With around 30,000 trailers and 13,000 drivers, the company is responsible for transporting over 12 million shipments annually. They do this by utilizing their massive network of 294 service centers. As you can see in the image above, its map looks very similar to the maps of both Yellow and Old Dominion Freight Line. With the company's network touching 99% of all zip codes in the country, it definitely stands to benefit from a major competitor going out of business. And just like with Old Dominion Freight Line, it can benefit from either assets essentially disappearing from the market and by picking up assets that are complementary to its own.

There are some problems, however, with this particular player. For starters, it is nowhere near as profitable as Old Dominion Freight Line. From 2020 through 2022 , total revenue for the company expanded from $6.17 billion to $7.72 billion. But as you can see in the chart above, profitability for the company, while improving during this window of time, still remains far lower than what Old Dominion Freight Line has achieved. I would argue that a good portion of this difference can be traced back to the fact that, while Old Dominion Freight Line has a little over 23,000 employees, XPO has 38,000. Just like its competitor, this year has also been looking a bit weak. But that's to be expected during difficult economic times.

One could argue that, because of the lower profitability, XPO stands to benefit more from picking up quality assets that could improve its market share position. I think that this is definitely the correct way to look at it when it comes down to more than just picking up good assets. Another issue is whether the company can afford to pick up a sizable amount. Whereas Old Dominion Freight Line boasts very little net debt, the opposite is true regarding XPO. As of the end of the most recent quarter, the company had net debt of $2.23 billion, for a net leverage ratio of 2.23. This is not awful by any means, but it's not great either. And it certainly does not bode well when the company it might have to bid against has only a modicum of debt for a net leverage ratio of 0.01.

Takeaway

Based on all the data provided, I must say that it is a shame what happened to Yellow. Regardless of the cause, innocent people will be hurt because of it. This includes not only the investors, but also, and perhaps more importantly, the employees. If these assets are sold off, there could very well be an opportunity for those individuals, at least some, to be rehired. In the process, the companies that have an opportunity to pick up assets on what will likely be on the cheap should benefit immensely. I would argue that both XPO and Old Dominion Freight Line stand to benefit, but the latter is definitely more likely, in my book, to be able to take advantage of this situation.

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