Aug 13 2020 - YRC Worldwide Inc.: Shares Still Heavily Discounted - Part1C

YRCW's Industry Comps

Source: Seeking Alpha, Centaur Investments

The spreadsheet emphasizes the clear divergence in valuations between prime transportation companies and those perceived as risky. In our view, the valuation gap is so wide it seems unsustainable. There are two ways we see that valuation gap tightening, and these are: 1.) large-cap transportation shares remain flat or continue to increase at a slower pace while small cap transportation shares outperform, or 2.) small-cap transportation shares remain flat while large-cap transportation shares decline.

Centaur Investments believes that the industry average enterprise-value-to-EBITDA multiple may be applied to YRCW to obtain a second valuation estimate. In the enterprise value ("EV") calculation for YRCW, the company's right-of-use operating leases were backed out of the debt calculation. This debt was automatically added by financial data feeds which ignore accounting rule changes. The addition of this debt was due to a 2016 FASB accounting standards update for leases which became effective in 2019 (See: ASU 2016-02.)

After this minor EV recalculation, applying the industry average EV/EBITDA multiple to YRCW yields an implied stock price of .85 which suggests there is an additional 96% upside for the shares. Restricting the multiple analysis to the companies highlighted in blue returns average multiples for the less-than-truckload ("LTL") category. Applying this EV/EBITDA LTL average to YRCW yields a price target of .10. Note how both of these approaches leads to price targets that are very close to the price suggested in our DCF model.

Near-term downside risks are currently linked to the four following disruptive events:

1. a sudden unexpected economic deterioration arising from a market panic,
2. inability for congress to reach a consensus on a second economic stimulus package,
3. a continued or worsening COVID-19 infection wave with no vaccine approval in sight,
4. market volatility due to election outcome uncertainly,
5. and interference from the Congressional Oversight Committee's inquiry into YRCW’s CARES Act loan.

Centaur Investments believes that, currently, the pandemic and uncertain economic recovery present a greater near-term risk to shareholders than the Oversight Committee's inquiry. Nevertheless, it is nearly impossible to predict which direction speculators will send YRCW’s stock price in the event that any one of the above-mentioned downside catalysts materializes. The absolute worst case scenario for shareholders involves the Oversight Committee attempting to alter the terms of or revoke altogether the company’s CARES Act loan package. However, that outcome seems highly improbable. In our opinion, downside risks 1-4 from the list above are far more realistic and could trim about 37% from YRCW's current 5.6x EV/EBITDA valuation. Such an event could send the shares down to about .50 from the current share price. (Rough Calculation: 5.6 x 0.63 = 3.53; /5.6 = 0.71 x 3.53 = .52)

Closing Remarks

We are experiencing a strange investment environment as Robinhood traders bid up bankrupt companies like Hertz, and support stock prices of much riskier non-essential businesses like travel and hospitality, casinos and entertainment, and energy companies which will exit this recession many times more seriously over-leveraged than YRCW. Yet these companies generate more investor interest and attract valuations substantially higher than this large LTL carrier trusted by the U.S. Department of Defense. At just 0 million, the company's current market capitalization is far less than the value of its physical assets and cash balance of nearly 0 million.

While some investors may see YRCW as a company that was well on its way out of business long before this COVID-19 induced economic downturn, the arguments presented in this article dispute those views. Further, the substantial volume of supporting evidence proves that YRCW’s has come a long way since the 2008 financial crisis. The fact remains, management was in process of executing a massive multi-point and multi-year strategy, and far along on the path towards achieving sustainable profitability precisely when the pandemic hit.

Yet despite all the publicly available material presented throughout this article, speculators continue to mistakenly write the company off as though the entire 0 million CARES Act loan were simply to plug a hole in their payroll. Watching the shares peak at .50 in pre-market trading and sell off below immediately following the CARES Act loan announcement was absolutely baffling. The following week, NASDAQ regulators had to add the company ticker to their short sale-related circuit breaker twice due speculative attack on the shares. Though daily short interest has declined to 10% from the +21% observed throughout June and July, speculators continue to take the stock down after every positive announcement for no apparent reason.

So, why exactly are the shares trading so erratically and seemingly detached from reality? As stated multiple times throughout this article, Centaur Investments believes it is due to a serious case of collective cognitive bias that dates back to the 2008 financial crisis. The bias is so widespread, even experienced industry insiders believe in serious misconceptions about the company.

In closing, we would like to share that YRCW's case is so bizarre and complex that our thesis had to be broken out into two parts. If you made it this far, you have just completed part one. We shared an updated 15-point thesis and the supporting evidence necessary to argue why we firmly believe YRCW will be continuously repriced higher by the market. We also shared the intuition behind our estimated equity valuation of the business and price target, and also discussed the inherent risks to this investment opportunity.

Part two will address YRCW's leverage, pension funds, Congressional Oversight Committee inquiry, and pending Department of Justice Lawsuit decision. It will also introduce a newly developed behavioral finance component of our long thesis. This behavioral component casts a spotlight on several cognitive biases we believe contribute to the extreme share price discount by exploring and refuting the most popular bearish views towards YRCW. In the meantime, feel free to sound off in the comments below, send a direct message, and follow Centaur Investments on Seeking Alpha for regular updates.