Stock Mart: Arkansas Best

Don't tell Alan Greenspan, but the economy is so good that Arkansas Best (ABFS) is raising its prices.

Arkansas Best, the fourth-largest player in the less-than-truckload hauling industry, says it plans to follow the example of industry leaders and raise its prices 5.1% later this month. The move follows a similar one announced this week by a trio of larger rivals. Less-than-truckload carriers combine smaller shipments from several different customers into a single truckload and deliver them to multiple destinations in a single geographical area.

Arkansas Best's ABF Freight System, based in Fort Smith, Ark., is a national less-than-truckload hauler. ABF Freight accounts for 75% of Arkansas Best's annual revenue, which the company forecasts will reach $1.7 billion this year. Treadco, a truck tire retail subsidiary that was purchased in January, accounts for 11% of revenue. G.I. Trucking, a regional hauler, and Clipper Group, which combines highway and rail shipping, are two other less-than-truckload hauling subsidiaries that account for 8% and 6% of revenue, respectively.

"The economy is good, and I think we're finally getting some recognition for our good earnings," says David Humphrey, Arkansas Best's director of investor relations. The company's stock has climbed 143% since the beginning of the year, he adds.

Despite that rise, the company still looks like a bargain. For example, Arkansas Best's trailing price-to-earnings ratio is about 9, much less than that of Roadway Express (ROAD) of Akron, Ohio, whose P/E is about 14. Roadway's stock closed at 21 3/4, up 1/4, Friday; if Arkansas Best had the same P/E as Roadway, its stock price would be about 18. Instead, Arkansas Best closed Friday at 13 5/16, up 1/4.

Arkansas Best's other fundamentals -- price-to-sales at 0.16, and price-to-book at 1.4 -- are also at levels that bargain hunters target.

That's one of the reasons (AMRIX)Armada Small Cap Value I fund likes it, according to Dan DeMonoca, an analyst for the $270 million fund, based in Wayne, Pa. The company's P/E, which has dipped under 9 in the past, makes the stock cheap, DeMonoca says. "And the company has a history of beating its earnings estimates -- and that's important to us."

Indeed, Arkansas Best treated analysts to a positive surprise last month when it reported second-quarter earnings of 47 cents per share, a full dime, or about 27%, above expectations. Arkansas Best also reported that revenue grew more than 3% to $419 million, compared with $406 million for the comparable period last year.

Tim Quillin, an analyst for Stephens, a boutique investment bank in Little Rock, Ark., says that despite the recent run-up in the stock (up 28% since July), there's still more upside. "I see the share price in the mid- to high-teens over the next 12 months," he says. Quillin has a buy rating on the stock. Stephens hasn't performed recent underwriting for the company.

Things haven't always rolled so smoothly at the trucking company, however. In August 1995, Arkansas Best bought a similar-sized rival, Worldway, and its largest subsidiary, Carolina Freight. The digestion of the merger proved difficult, admits Arkansas Best's Humphrey, adding the company had more trouble than it expected integrating Carolina Freight's operations.

After posting positive annual earnings since 1990, Arkansas Best posted a loss of $1.21 per share in 1995 and a loss of $1.97 for 1996. By 1997's second quarter, the company's earnings were back in the black. Arkansas Best has posted positive earnings for the past nine quarters.

The company's 1998 earnings were $1.21 per share, a 44% increase over the previous year's 84 cents per share. That growth has analysts bullish for the future. Consensus estimates for this year are $1.62 per share, a 33% increase, according to First Call. For next year, the consensus is $1.77 per share, an estimate that would put the stock price around $17 per share based on the current P/E.

Perhaps the only oversized load Arkansas Best is trying to haul is the debt it's carrying on its balance sheet, analyst Quillin cautions. The company has about $207 million in long-term debt, giving it a debt-to-equity ratio of 1.09, which is almost twice the industry average. Management has made an effort to pay that debt down, a fact Standard & Poor's noted late last month when it revised the company's outlook to positive from stable. "Arkansas Best's ratings reflect a good operating record, offset by a competitive industry environment, and an historically aggressive financial policy," S&P said.

But overall, Arkansas Best is starting to get the recognition it deserves because its stock price is so strong, says Armada Funds' DeMonoca. "We think it was getting overlooked before -- now it's getting some good visibility."

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