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Arkansas Best Corp. $44 – Nasdaq symbol ABFS

ARKANSAS BEST CORP. $44 (Nasdaq symbol ABFS; WSSF Rating: Average) specializes in long-haul, less-than-truckload (LTL) shipping services, which combine freight from several different customers into a single truckload. LTL accounts for roughly 90% of Arkansas Best’s revenue.

Freight carried by the company includes food, textiles, apparel and furniture. Arkansas Best’s fleet services customers in all 50 states, as well as parts of Canada and Mexico.

The company also provides full-truckload shipping services, and transports cargo containers over long distances using trucks and railroads. It also provides logistical services, which help its customers better manage their shipping needs.

Trucking is a cyclical industry that moves up and down with the overall economy. The economy struggled in the early part of this decade, and Arkansas Best’s revenues fell from $1.8 billion in 2000 to $1.4 billion in 2002. But revenue improved to $1.7 billion in 2004 as the economy picked up. In 2005, revenue probably grew to $1.8 billion.

Profits before one-time items fell from $3.05 a share (total $73.3 million) in 2000 to $1.43 a share ($36.4 million) in 2002, but grew to $2.94 a share ($75.5 million) in 2004.

Efficiency & reliability spur growth

One of the reasons for Arkansas Best’s turnaround is its close attention to costs. In the first nine months of 2005, its operating ratio (regular operating costs divided by revenue—the lower, the better) fell to 91.4% from 92.5% for the same period in 2004. That makes it one of the most efficient LTL providers in the U.S.

The company has a strong history of reliability. In the past 10 years, it has delivered 99% of its shipments without loss or damage. Thanks to its high quality service, Arkansas Best has had little trouble passing along rising costs to its customers. This helps the company keep its operating ratio down, particularly as fuel costs shot up in 2005.

Arkansas Best’s strong reputation is also letting it take advantage of a lack of capacity in the trucking business. It’s now more selective taking on new contracts, and focuses only on those with predictable costs and high profit potential.

Union contract locks up drivers

The company is also profiting from a shortage of qualified truck drivers. Unlike many of its LTL competitors, Arkansas Best’s prefers to use unionized drivers. Right now, about 75% of its workforce is unionized. While that adds to it costs, it also helps it avoid driver shortages and cuts its overall risk. The current union contract expires in 2008.

Arkansas Best also recently negotiated a separate deal with its main union that makes it easier for it to expand into new parts of the shipping industry. For instance, it now offers same-day and overnight delivery services in parts of the U.S. Northeast. The company earns higher profits from these services compared to its regular delivery schedules, and aims to gradually offer short-haul services in other areas of the U.S. in the next five years.

Long-term trends look favorable

Despite rising fuel costs, the outlook for the trucking industry is still bright. Growing trade with China and other developing nations has spurred greater need for trucking services. Rising consumer interest in e-commerce and online auction sites is also creating more demand for ground delivery services.

However, customers are starting to resist these extra fuel surcharges and may switch to other firms. It’s likely that Arkansas Best will limit new surcharges to certain routes instead of an across-the-board increase.

Trucking firms will also have to upgrade their fleets in the next two years to comply with tougher new environmental laws. Consequently, Arkansas Best’s capital spending will grow by nearly a third, from around $3.15 a share in 2005 to $4.15 in 2006.

The company generates annual cash flow of roughly $6.00 a share, so it can easily afford these extra costs. Newer, more fuel-efficient trucks will also cut its long-term operating expenses. Arkansas Best’s strong cash flow should also give it room to increase its $0.60 dividend, which yields 1.4%.

Stock buybacks should rise

Arkansas Best also has one of the trucking industry’s strongest balance sheets. It’s virtually debt free, and has $105.3 million (or $4.17 a share) in cash. That gives it plenty of flexibility to make acquisitions, expand its current operations or buy back more shares. In the first nine months of 2005, it spent $12.6 million on share repurchases. The company still has $42.9 million left under its current repurchase authorization.

We first recommended Arkansas Best in our January 2001 issue at $15, and it got as high as $47 in 2004. It dipped to $30 in 2005, but has moved up again.

It now trades at just 12.2 times the $3.62 a share it probably earned in 2005. It’s also cheap in relation to its revenue of roughly $72 a share.

Arkansas Best is a buy.

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