by Marty Cook
Posted 12/9/2013 12:00 am
While analysts say it will take awhile for ABF Freight System Inc. to fully realize the benefits of its five-year labor agreement with the Teamsters, the deal is already going over well on Wall Street.
The company said it expects to save between $55 million and $65 million annually through lowered labor costs and benefits with the agreement, which covers about 7,500 employees and runs through March 2018.
What is obvious in the here and now is that the labor agreement has provided a healthy boost to the stock price of Arkansas Best Corp. of Fort Smith, the publicly traded parent company of ABF. When the labor agreement was first agreed to, back in late June, shares of Arkansas Best were trading at $19.99.
On June 28, the day after the agreement was announced, shares closed at $22.95 and more than 2 million shares were traded.
Arkansas Best closed Wednesday at $34.39, an increase of more than 72 percent since June 27. Arkansas Best has about 25.73 million outstanding shares, and a $14.40 increase in share price represents more than $370 million in market capitalization.
It’s clear why Arkansas Best CEO Judy McReynolds called the labor agreement a “milestone” when it was announced.
“Everyone liked the terms,” said Brad Delco, a transportation analyst with Stephens Inc. of Little Rock. “That has been seen in future earnings and the stock price.”
Stephens recently rated Arkansas Best “overweight,” a positive term perhaps only in the world of finance. Delco said overweight is Stephens’ term of choice for “buy,” and the firm pegged Arkansas Best’s target share price at $36.
Other analysts have pegged Arkansas Best shares at lesser figures, but still over the 52-week range of $8.42 to $25.98 the stock was muddling along at before the labor agreement.
Arkansas Best posted solid third-quarter earnings of $14 million, although the labor agreement seemed to have little to do with those figures. The national agreement was reached June 27, but because of resistance to some of the regional pacts, final implementation didn’t happen until Nov. 3. “It hasn’t shown up in results yet,” Delco said.
The agreement’s headline items were a 7 percent reduction in pay and one-week reduction in vacation, with workers eventually getting the pay reduction back in yearly 2 percent raises. Arkansas Best continued its level of contribution to health insurance and pensions.
“They didn’t have to give up much to do it,” said Delco, referring to the pay reduction. “Arkansas Best employees realized they still have it pretty good. Concessions had to be made to keep Arkansas Best competitive.”
At least as important as the labor cost reduction is the flexibility the company now has. The regional supplements give ABF Freight the right to adjust work rules for each union to maximize efficiency and lower costs.
Arkansas Best officials have said the labor agreement was the first step, and the company revealed in an SEC filing last week that it plans to close or consolidate 30 of its 277 terminals. It’s a move analysts were expecting because other carriers have also reduced their networks to streamline operations, and the labor agreement gave Arkansas Best greater latitude in such decisions. “They have much more flexibility,” Delco said.
ABF’s deal with the Teamsters is something a key competitor, YRC Worldwide, is hoping to reach soon. YRC Worldwide, based in Overland Park, Kan., is in tighter straits than Arkansas Best and is attempting to negotiate an extension of its current contract with the Teamsters.
A union committee was scheduled to evaluate the YRC Worldwide proposal late last week. The current labor deal between the two entities runs through March 2015, but YRC Worldwide needs an extension in order to restructure debt.
Interestingly, YRC Worldwide broached the subject of buying Arkansas Best this past spring before being turned down. Since then, Arkansas Best has negotiated a labor deal for its less-than-truckload carrier, something YRC Worldwide and its subsidiary YRC Freight need to arrange.
The Teamsters have made several salary concessions in recent years with YRC Worldwide, but Delco believes this current negotiation mainly will revolve around extending the agreement through 2019. YRC has $1.4 billion in debt, and creditors are insisting on a longer labor agreement as a prerequisite to refinancing.