We are downgrading our recommendation on YRC Worldwide Inc. (YRCW) to Underperform. The struggling trucking company continues to suffer from one setback after another. In its fiscal 2010 annual report, management declared that it missed a major restructuring milestone in the first week of March 2011. This may prompt the company’s lenders to declare YRC Worldwide as a defaulter in its credit agreements. If this actually happens, the company has to seek protection under the bankruptcy law.
During the last two and half years, YRC Worldwide has been reeling under possible bankruptcy due to a significant fall in freight volume coupled with its highly leveraged balance sheet. Although the trucking industry is recovering from the recession, YRC Worldwide fails to cope with this current recovery.
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. The trucking industry is highly competitive. YRC Worldwide is gradually losing market share to its competitors Arkansas Best Corp. (ABFS), Con-way Inc. (CNW) and Knight Transportation Inc. (KNX).
YRC Worldwide is facing major challenges including sustaining liquidity, dilution of preferred stock, loss of customers and a competitive LTL market. The company is trying to deter the imminent financial collapse in every possible way. Despite prudent moves to manage liquidity, we believe YRC Worldwide must stop cash consumption for operations. In our view, the company’s near-term bankruptcy risks persist.
In February 2011, YRC Worldwide entered into a deal with its creditors and labor union Teamsters Brotherhood to restructure its sagging finances. The lenders will inject fresh capital in the form of equity and convertible debt. This will significantly dilute the wealth of the existing shareholders.
YRC Worldwide has already securitized a portion of its outstanding debt through the issuance of 1.2 billion of its common shares. This massive increase in the total number of outstanding shares has significantly reduced the company’s stock price. The huge dilution of EPS remains a major concern for the company.
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YRC WORLDWD INC (YRCW): Free Stock Analysis Report
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