Yellow: Don’t Throw The Baby Out With The Bathwater (NASDAQ:YELL)

Intro

If we pull up a long-term Yellow Corporation (NASDAQ:YELL) chart, we can see that shares are close to testing their 2020 all-time lows. Although sentiment remains depressed in the trucking company, there is every chance that Yellow’s steep decline comes to a halt here over the near term. The question then will be whether investors will begin to step in on the long ride on a convincing swing low. We state this because, despite Yellow’s very high debt load and negative earnings (Non-GAAP earnings of $0.92 per share in Yellow’s most recent quarter), this stock still has potential if indeed phase 2 of the ‘One Yellow’ transformation can gain traction over the near term.

As Yellow continues to integrate its operations into one brand, management remains adamant that the implementation of phase one has seen benefits right across the board. Early shipments have now gained traction, efficiency has improved regarding collections from customers, and customer needs, in general, are now being met more solidly. The roll-out of Phase 2 will be a much bigger initiative comprising approximately 70% of the entire network but the market still awaits progress in this area. Rolling out phase 2 is vital as once this is done, Yellow’s capital structure will come under review with respect to how the company’s very high leverage levels can be resolved somewhat. Total debt for example in Yellow came in at $1.51 billion at the end of Q1 which is a sizable number when compared to the company’s present market cap of a mere $73.57 million.

Potential

However, if as individual investors, we look at Yellow through the eyes of a prospective buyer, Yellow’s fundamentals may not look as dim as many may think at present. Suffice it to say, instead of focusing on the company’s negative earnings & high debt environment, Yellow’s operating profit would be a better read on how much income the trucking company is actually making. Yellow’s EBIT for example comes in at a positive $134 million over the past four quarters whereas interest expense comes in at $172 million over the same timeframe. Now a prospective buyer could come in and immediately dispose of Yellow’s debt (At a cost of course) to ensure cash-flow generation remains the top priority at the firm.

In saying this, Yellow’s current operating profit resulted in +$167 million of generated operating cash flow over the past four quarters and +$277 million of EBITDA. These are the numbers that give Yellow’s business value as our buyer could immediately hit the ground running by using this cash to invest aggressively back into the company instead of having to grapple with the company’s leverage from quarter to quarter. The above operating cash-flow number for example equates to an ultra-low trailing cash-flow multiple of 0.44.

Return On Capital

On the profitability side, although bottom-line earnings are expected to be firmly in negative territory this year (-$3.30 per share), analysts who cover Yellow expect a strong recovery in fiscal 2024 (-$1.04) as the ramifications of the one-Yellow network rollout should begin to bear significant fruit at that stage.

To gain insights into how Yellow’s core profitability and how again a prospective buyer would view Yellow at present, we can use the popular return on capital metric where we would use Yellow’s operating earnings (instead of net earnings) to ensure the company’s debt will not feature in the calculation. So in essence, Return on capital =

Furthermore on the denominator side (Net working capital + Net Fixed Assets), we want to eliminate debt once more as all we are interested in is how much capital is required to essentially run the business. Furthermore, balance sheet cash would also not be used in the above calculation as it is not required to run the business.

Therefore, when we run the numbers from Yellow’s balance sheet at the end of its most recent first quarter, we get the following.

Return On Capital = 134 / (11.50 + 1287) = 10.32%.

Conclusion

Therefore to sum up, although high debt loads, negative book values, and negative earnings may look ugly on the surface, ‘strong hands’ invariably come to the rescue if the respective company is generating cash, can allocate that cash well and the valuation has dipped to such a depressed level that investment is warranted. Let’s see if shares can successfully test support here over the near term. We look forward to continued coverage.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.