Bottom of the Barrel: A Smoother Ride for Roadway

Even as the market hits the brakes, this week's Bottom of the Barrel keeps on trucking.

This week's highlighted stock, Roadway (ROAD Quote), is in the trucking business. The Akron, Ohio-based company provides less-than-truckload, or LTL, services to companies throughout North America, through both long-haul and regional contracts.

The not-very-exciting trucking business has been a tough road to navigate over the past year. The economic slowdown and higher operating costs have punished Roadway's earnings, which have dropped from a peak of nearly $3 a share in 2000 to an estimated $1.70 this year.

Roadway investors have felt those bumps, too. Since the company stumbled badly in the first quarter with its per-share loss of 9 cents, its stock has tumbled, losing nearly 20% since mid-March. Although that disappointment left some investors wondering if Roadway had engine failure, it's now looking more like a flat tire.

Onramp

Few investors question the recession's impact on manufacturing and transportation. The weak domestic manufacturing sector pushed LTL volumes 15% lower in the first quarter vs. 2001 levels. That, in turn, pressured margins and ultimately earnings.

"What is clear to us is that the losses in [the first quarter] were due to an unusually poor January for Roadway Express and New Penn," notes Credit Suisse First Boston transportation analyst Gary Yablon. "We believe both divisions have been improving results ever since. From what we can tell, part of the improvement is due to overall trends in the LTL marketplace, and part is due to Roadway improving its own operations."

Yablon rates Roadway strong buy with a $42 price target. (The stock closed Tuesday at $32.77.) His firm has provided banking services to the company.

At a Glance Roadway (ROAD:Nasdaq)
Current price	$32.77
52-week range	$41-$22
Price-to-earnings ratio*	17.86
Market cap	$605.3 million
Avg. daily volume	15,454
Inst. ownership	41%
Dividend yield	0.60%
Beta	0.18
Company Web site	www.roadwaycorp.com
*Based on 2002 estimates, funds from operations Sources: Market Guide, First Call, company reports, TSC research

Although Roadway should report a decrease in tonnage (the weight measure of demand in the trucking business) of about 3% year over year in the second quarter, that's a marked improvement from the 15% year-over-year decline in the first quarter. Consensus estimates call for Roadway to earn 27 cents in the second quarter, and that may prove modest.

The LTL business appears to be turning the corner. Although not dramatic, tonnage continues to improve. Yellow (YELL Quote), another LTL carrier, said earlier this month that year-over-year tonnage increased in both April and May and predicted that it would post its first quarter of year-over-year tonnage increases in nearly two years. Companies are reluctant to discuss pricing, but it looks stable, hinting that trucking companies are not having to sacrifice margin for volume.

Both Roadway and Yellow are also benefiting from struggles at Consolidated Freightways (CFWY Quote), an LTL carrier that's facing a number of financial and operational challenges. Consolidated had been attempting to gain market share by discounting, but it had little success, as customers appear willing to pay for the comfort of knowing a shipper will remain in business.

"We are also hearing talk of a number of large shippers leaving Consolidated Freightways for their larger national competitors," notes Yablon.

Offramp

The economy's importance to a transportation company like Roadway shouldn't be underestimated. With pundits still pontificating about the timing and strength of the recovery, an earnings recovery could be further away than bulls, like Yablon suggests.

Pedal Down, Trucking Ahead Economic recovery should fuel Roadway
Year	Revenue (in millions)	Earnings per share
2000	$3,039.6	$2.98
2001	2,791.7	1.82
2002*	3,118.0	1.75
2003*	3,379.2	3.00
*Estimates Sources: First Call, Credit Suisse First Boston, company reports, TSC research

If the recent acceleration in trucking demand is a head fake, then Roadway may skid again in the third quarter. As noted above, January's weakness hit the company hard, including a 150-basis-point reduction in Roadway's operating ratio. While the company can reduce labor costs at the margin, many of its terminal costs are fixed. Overreaction to economic malaise would leave Roadway ill-prepared to react quickly once the economy and shipping demand accelerate for real. In short, Roadway's success is heavily leveraged to the economy; to believe the story, you have to believe in a recovery.

The second potential pitfall is labor unrest. Although that's not a direct concern for Roadway employees, the possibility of work disruptions at major U.S. ports could affect trucking firms. Some importers have expedited shipments into ports because of concerns over a port strike. If goods can't get unloaded in major shipping ports, the ground transport business could suffer.

Passing Lane

Roadway may also surprise investors with its ability to improve efficiencies and add to margins as it expands its regional LTL business and increases its commitment to next-day shipments, businesses that are less sensitive to economic cycles. Plus, management remains committed to improving the efficiencies of its hub-and-spoke system, which should positively impact results.

Yet, Roadway is largely a bet on a second-half recovery. If that happens, Roadway should conservatively earn about $1.73 a share this year and about $2.85 next. If that is correct, the stock trades at a very reasonable multiple of 11 times 2003 earnings. Also, watch for the company to beat second-quarter consensus and tweak estimates on its second-quarter conference call in early July. That could rekindle interest in the stock.

With economic uncertainty as the primary concern, I like Roadway and give it 2 1/2 barrels. (For an explanation of our barrel rating system, see our description.)

Barrelology

Not a lot of good news from the Barrel portfolio last week, as little in the equity universe worked. Investors continue to fret over international safety, corporate chicanery and earnings erosion. Yet a number of solid companies in the portfolio deserve a look, especially at current prices.

en

Searching for Opportunity Lower Prices Create Intriguing Value
Current rating	Company/ticker	Date of mention	Price 17-Jun	Mention price*	% Change from mention	% Change last week
Above average outlook
	Fidelity National (LION:Nasdaq)	May 8, 2002	$10.35	$10.58	-2.17%	-1.43%
	NetBank (NTBK:Nasdaq)	Feb. 6, 2002	11.23	13.45	-16.51	-4.59
	SurModics (SRDX:Nasdaq)	Dec. 19, 2001	30.67	34.60	-11.36	-8.88
	FPIC Insurance (FPIC:Nasdaq)	Nov. 14, 2001	13.11	12.83	2.18	-1.06
Average outlook
	Innotrac (INOC:Nasdaq)	June 12, 2002	$4.97	$4.79	3.76%	1.61%
	Champps Entertainment (CMPP:Nasdaq)	May 29, 2002	11.45	13.01	-11.99	-0.35
	Wilsons Leather (WLSN:Nasdaq)	May 22, 2002	14.00	14.96	-6.42	-2.78
	Trico Marine (TMAR:Nasdaq)	May 1, 2002	7.22	8.25	-12.48	0.28
	Arch Chemicals (ARJ:NYSE)	April 24, 2002	21.40	22.52	-4.97	-4.72
	Hines Horticulture (HORT:Nasdaq)	April 17, 2001	4.10	4.75	-13.68	0.00
	UCBH Holdings (UCBH:Nasdaq)	March 27,2002	37.35	35.65	4.77	-0.74
	Cost Plus World Markets (CPWM:Nasdaq)	March 6, 2002	31.40	25.83	21.56	-4.38
	Rare Hospitality Intl. (RARE:Nasdaq)	Feb. 20, 2002	27.32	25.72	6.22	-6.76
	VitalWorks (VWKS:Nasdaq)	Nov. 21, 2001	7.57	4.30	76.05	-11.77
	Endocare (ENDO:Nasdaq)	Jan. 23, 2002	12.30	18.21	-32.45	-18.65
	Coastal Bancorp (CBSA:Nasdaq)	Dec. 12, 2001	30.43	27.84	9.30	1.77
	Coinstar (CSTR:Nasdaq)	Nov. 7, 2001	25.48	19.96	27.66	-5.63
	Witness Systems (WITS:Nasdaq)	Oct. 31, 2001	6.15	8.06	-23.70	2.33
	Hibbett Sports (HIBB:Nasdaq)**	Oct. 24, 2001	27.20	20.04	35.73	3.03
	Quixote (QUIX:Nasdaq)	Oct. 3, 2001	17.16	21.44	-19.96	-0.87
Below average outlook
	Actrade (ACRT:Nasdaq)	Jan. 30, 2002	$11.24	$20.65	-45.57%	-17.17%
	Goody's Family Clothing (GDYS:Nasdaq)	Nov. 28, 2001	10.03	4.50	122.89	-3.56
	Bridgford Foods (BRID:Nasdaq)	Oct. 10, 2001	14.55	13.18	10.39	0.41
	Quanta Systems (PWR:NYSE)	Jan. 9, 2002	13.16	16.05	-18.01	3.22
Bottom of the Barrel Income Portfolio
	Acadia Realty (AKR:NYSE)	June 5, 2002	$7.61	$7.03	8.25%	1.47%
	Capital Automotive REIT (CARS:Nasdaq)	April 3, 2002	22.96	22.95	0.04	0.22
	Laclede Group (LG:NYSE)	March 20, 2002	22.99	23.64	-2.75	-1.37
	Alexandria Real Estate (ARE:NYSE)	Feb. 13, 2002	47.20	40.25	17.27	0.96
	Empire District Electric (EDE:NYSE)	Jan. 16, 2002	19.07	21.23	-10.17	-2.00
	Met-Pro (MPR:NYSE)	Oct. 17, 2001	15.04	11.16	34.77	0.53
	Integra Bancorp (IBNK:Nasdaq)	Jan. 2, 2002	22.59	20.75	8.87	-0.04
Bottom of the Barrel Special Situation Portfolio
	Luby's (LUB:NYSE)	Feb. 27, 2002	$6.76	$6.22	8.68%	-0.59%
*Average price on date of mention. **Prices adjusted for 3:2 split on Feb. 20, 2002 Sources: Thomson Financial/First Call, TSC research

For example, at only $11, NetBank (NTBK Quote) provides a great entry point. It will benefit as the financial service companies recover, and its recent entry into the insurance business and increase in residential lending exposure continue its transition to a full-service company.

On a negative note, Actrade (ACRT Quote) announced last week that both the Securities and Exchange Commission and the Nasdaq are looking more closely at recent filings from the company. In today's environment, any inquiry is too much, so I've changed Actrade to a barricade and continue my below-average outlook on the stock.

Finally, Endocare (ENDO Quote) is moving to the average outlook list. Although the cryotherapy treatment for prostate disease continues to hold promise, Endocare faces a number of skeptics regarding its financial relationships with doctors who use its products. Given Endocare's recent lackluster performance, time is needed to improve its prospects.

Next week I'll look ahead to second-quarter earnings, including reporting dates for all companies in the portfolio.