Yellow, a major less-than-truckload (LTL) shipper, recently filed for Chapter 11 bankruptcy protection. This development presents an opportunity for other players in the industry to gain market share.
LTL shipping primarily serves industrial customers by transporting goods from sellers to buyers. With Yellow ceasing operations, its market share is up for grabs. Comparing the size of Yellow’s fleet, consisting of nearly 13,000 heavy-duty trucks, to other LTL peers like Old Dominion Freight Line, XPO, Saia, and ArcBest, it becomes apparent that there is significant potential for these competitors to benefit from Yellow’s closure.
FedEx Ground, a diversified logistics provider that also offers LTL services, operates a fleet of around 25,000 heavy-duty trucks. Therefore, FedEx is another company likely to capitalize on Yellow’s exit from the market.
Investors have already taken notice of this opportunity. Prior to Monday’s trading session, stocks of the four LTL peers and FedEx had seen an average gain of 15% over the past month, while the S&P 500 only increased by approximately 2% during the same period.
It is important to note that while further gains may be on the horizon, investors should approach the situation with caution and selectivity due to the recent price increases. For instance, Evercore ISI analyst Jonathan Chappell raised his price target for XPO shares from $56 to $72 based on the company’s strong earnings report, which surpassed expectations. Chappell also attributed this positive outlook to the potential disruption caused by Yellow’s liquidation.
Overall, Wall Street’s outlook on XPO stock remains positive, with approximately 60% of analysts rating it as a Buy. This figure exceeds the average Buy-rating ratio of about 55% for stocks in the S&P 500. The average analyst price target for XPO stock is around $74, slightly higher than the current trading price of $72.12.
Similarly, other LTL peers such as Saia may offer limited upside potential. Approximately 53% of analysts covering Saia stock rate it as a Buy, and the average price target is approximately $441, while the stock is currently trading at about $428.
Old Dominion: A Strong Buy with a Target Price of $411
Around 29% of analysts highly recommend investing in Old Dominion shares, marking them as a Buy. The average target price for these shares is about $411, which is approximately $1 higher than their current trading value.
FedEx: A Diverse Option with a Target Price of $265
FedEx, being a more diversified company, presents a similar investment opportunity to Old Dominion and Saia. A significant 59% of analysts recommend buying FedEx shares, and the average target price is around $265. At present, the stock is trading at approximately $264.
ArcBest: A Unique Prospect with a Target Price of $136
The story for ArcBest is slightly different compared to Old Dominion and FedEx. It is rated as a Buy by 64% of analysts, and the average price target is $136. This implies a potential gain of 17% from the current price, which is about $116.
Debt Ratios: A Vital Comparison
It is also crucial to examine the companies’ indebtedness relative to their earnings. The downfall of Yellow was largely attributed to high debt and pension costs. Yellow’s total debt was about 5.6 times the earnings before interest, taxes, depreciation, and amortization (EBITDA) recorded over the past year. In comparison, the S&P 500 had a comparable figure of about two times, according to FactSet data.
However, both Old Dominion and Saia have very little debt. ArcBest’s debt ratio stands at a comfortable 1.1 times. On the other hand, XPO and FedEx have higher debt ratios at three times and four times, respectively.
Profit Margins: Indicators of a Healthy Business
Yellow generated an EBITDA profit margin of roughly 5% in the past year, but the other companies appear more favorable. ArcBest and FedEx had profit margins of approximately 8% and 11%, respectively. XPO’s EBITDA profit margin over the past year is about 12%. Saia and Old Dominion outperformed with profit margins of 22% and 34%, respectively.
Higher profit margins, especially when compared to industry peers, signify a robust and healthy business.
Looking Ahead: Potential Upside for the Industry
Although ArcBest may seem like the best option based on current price targets, it is possible that Wall Street will become more optimistic about the entire sector. As Wall Street continues to analyze the implications of Yellow’s troubles, price targets for other companies in the industry could also increase.