(By Balaseshan) RBC Capital Markets analyst John Barnes upgraded his rating on shares of Arkansas Best Corp.
(NASDAQ:ABFS) to "Sector Perform" from "Underperform" on a nice acquisition and in-line mid-quarter update. The brokerage lowered its price target to $13 from $17.
With yesterday's announcements Arkansas Best has done two things that makes Barnes believe his previous "Underperform" rating is no longer warranted. ABFS to acquire Panther Expedited Services Inc. for $180 million. The deal is expected to close on June 15 and management expects the company to have a positive contribution to EPS beginning in 3Q-2012.
Panther is a non-asset based expedited transportation company that generated $215 million in gross revenue and $24 million in EBITDA during 2011. Panther has historically been a fairly moderate grower, with revenue increasing at a 5% compound annual growth rate (CAGR) since 2006.
ABFS guided to Panther being accretive to EPS beginning in 3Q-2012. Barnes noted that this does not include any operational synergies, but he expects these to be small and mostly in back office functions initially. He estimates Panther will contribute $0.17 to 2012 EPS (up $0.09/share in 3Q-2012 and up $0.08/sh in 4Q-2012) and $0.31/share to 2013 earnings.
The brokerage narrowed its 2012 loss per share estimate to $0.29 from $0.46, while increasing its 2013 EPS estimate to $0.58 from $0.27.
Separately, ABFS provided 2Q-2012 operational update. Quarter-to-date trends (tonnage down 7% year-over-year, revenue/CWT up 6%, revenue down 1% and a modest operating profit) are inline with the analyst's expectations.
Management also stated that the core business has improved to the point that it should be able to fund capex with cash from operations on a go forward basis. Barnes is encouraged that the company is performing inline with his expectations after several quarters of extremely disappointing results.
Based on the purchase, which gives the company a solid earnings base, the gradual improvement in its core LTL operations and the current valuation, Barnes believes that there is now only modest downside potential to ABFS's share price relative to its peers. He now believes shares have found a bottom from both a valuation and stock price perspective.
That said, the analyst believes the company will need to demonstrate at least several quarters of material improvement in its core LTL operations for the shares to work in any meaningful way. Given the lackluster macro backdrop he believes this is unlikely and that the shares will likely remain range bound.
ABFS is trading up 6.11% at $12.33 on Friday.