How Less-than-Truckload Carriers’ Leverage Levels Compare after 2Q17
In this part, we’ll review the leverage levels of key LTL (less-than-truckload) carriers (IYT) in the US. The leverage level helps investors to determine the impact of the interest expenses on the per-share earnings of these roadways. Investors should be cautious about highly leveraged LTL carriers, as they carry the risk of further dilution of earnings per share.
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In this section, we’ll consider the net debt levels of the LTL carriers under consideration. We’ll use forward EBITDA (earnings before interest, tax, depreciation, and amortization) to know the extent of debt covered by a carrier’s cash earnings or EBITDA. Net debt is derived by deducting the cash and cash equivalents from a carrier’s interest-bearing liabilities.
A high net-debt-to-forward EBITDA multiple shows that a company has high debt levels, which normally result in a lower credit rating for the company. This, in turn, may force the company to pay high-interest charges. The multiple differs from industry to industry. Our observation shows that a ratio of 2.0x and above should be considered risky for the LTL industry.
Why XPO has the highest multiple
A close look at the above graph reveals that XPO Logistics (XPO) has the highest net-debt-to-forward EBITDA multiple of 3.35x among the companies we’re discussing. The acquisition of Conway and Norbert Dentressangle caused XPO’s debt levels to inflate further. In fact, in June 2017, XPO announced an $8.0 billion appetite for further deals in the transportation and logistics sector. This shows the company’s willingness to sustain these leverage levels.
YRC Worldwide (YRCW) came in second to XPO with a multiple of 2.67x. The company’s forward EBITDA is estimated at $290.0 million, whereas its total debt is $988.0 million. It had $215.0 million in the form of cash and cash equivalents at the end of June 2017.
SAIA (SAIA) ranks third in the peer group. The company’s net-debt-to-forward EBITDA ratio was 0.82x. However, it’s within limits of the 1.5x average of the discussed peer group. ArcBest (ARCB) has a multiple of 0.66x. Old Dominion Freight Line (ODFL) has the lowest ratio in the peer group. Given its scale of operations and revenue size, the company has the lowest total debt of $95.0 million among peers.
The next section deals with less-than-truckload carriers’ cash distribution to shareholders.