LTL industry likely altered regardless of Yellow’s fate

Equity analysts weighed in on Yellow Corp.’s latest reprieve Monday morning just hours after a planned strike, which would have closed the company for good, was called off.

The industry’s third-largest less-than-truckload carrier missed a July 15 benefits payment to health and welfare and pension funds managed by Central States. Teamsters at operating companies Holland and YRC Freight covered under the plans had threatened a work stoppage for Monday if their health insurance benefits lapsed on Sunday. However, Central States granted a 30-day payment extension to Yellow (NASDAQ: YELL) late Sunday at the behest of the union.

The union also announced it would return to the bargaining table with representatives from Yellow Sunday evening. As the industry awaits the outcome of those meetings, some analysts have said that even if the company survives, the competitive landscape of the LTL industry has likely been permanently altered.

“YELL lost a significant number of customers in recent weeks, Amit Mehrotra, Deutsche Bank (NYSE: DB) analyst, told clients Sunday night. “Some of those will likely come back — especially the lowest quality and most transactional — but we suspect the business will still endure a significant net reduction in volume even with today’s announcement.”

In recent weeks there have been multiple reports that shippers are steering loads away from Yellow as it attempts to reach an agreement on much-needed operational changes with the Teamsters. Last week, Uber Freight (NYSE: UBER) said publicly it had stopped tendering freight to the company.

Morgan Stanley (NYSE: MS) published a survey Monday of shippers, brokers and carriers either working with Yellow or involved in the LTL industry. Ninety-five percent of shippers tendering freight to Yellow said they were at least “somewhat concerned” about a potential strike or bankruptcy filing (55% were “very concerned”). Ninety-seven percent said they had already diverted or were considering diverting loads to another carrier.

All brokers surveyed have either moved freight away from the company or are considering it.

Best rate available and service were the top determinants on where that freight would go. XPO (NYSE: XPO), Old Dominion (NASDAQ: ODFL) and “other” were the top three likely destinations of shippers polled.

“XPO’s positioning likely reflects that they might be next on the service/rate scale and is probably most keen to take on additional volume here,” Morgan Stanley analyst Ravi Shanker said.

Of the hundreds of respondents surveyed in total, 66% of brokers said they expect permanent changes in the market given the issues at Yellow. Carriers (62%) and shippers (52%) agreed to a lesser degree.

Years of underinvestment in Yellow’s network has weighed on its service metrics (ranked last among national carriers in Mastio’s 2022 industry survey) and its yield versus cost profile. Shanker has less conviction than some analysts as to how profitable share wins, at Yellow’s expense, will be for other carriers.

“Shippers’ inclination to move to whomever has the best rate suggests that the appetite to go up the service scale is limited if it comes with additional costs,” Shanker said. “As such, we continue to believe that Yellow customers moving over could be a low-margin opportunity to other players.

“We remain hesitant that a potential disruptive outcome at Yellow will have significant follow-through to Yellow’s primary public peers,” Shanker said. He sees the chance for numerous possible outcomes for Yellow and thinks much of the carrier’s lost business will end up with smaller carriers before landing at large national providers like Old Dominion and Saia.

Mehrotra said the payment extension by Central States doesn’t really change Yellow’s outcome all that much. A recent exchange between Yellow’s CEO and the head of the Teamsters showed the company would also miss payments to two of the other three largest funds that manage benefits on its behalf. Also, it remains to be seen how long it would take for lost freight to migrate back to the carrier’s network even if it is able to strike a deal with the union.

“We also don’t see how this solves the financial issues YELL faces,” Mehrotra said. “We note, the company had over $100 million in cash as of the end of June, and it’s likely this balance is lower following recent customer diversions. If YELL makes its payments, we estimate it would take the company close to its $35 million liquidity floor implemented by lenders two weeks ago.”

Mehrotra raised his price target for shares of Old Dominion by 36% to $475 and Saia (NASDAQ: SAIA) by 28% to $463, citing favorable long-term earnings growth catalysts given both carriers’ “service centric strategy.”

Shares of Old Dominion (down 1.6%), Saia (down 0.9%) and XPO (down 0.4%) were lower at 12:46 p.m. on Monday compared to the S&P 500, which was up 0.4%. Shares of YELL were up 22.6%.

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