USFreightways Corp. – 21 May 1999
2
Good News on the Analyst Front
* USFC Management held its first ever, Analyst Day
in Chicago on May 20. We were very encouraged by
the tone of the meetings, which emphasized solid
growth going forward at each of its major divisions, in
the double-digit range. We believe this is likely, and
were encouraged by the clarity of direction and
purpose.
* Beyond the core trucking franchise, much time was
devoted toward clarifying the vision behind
USFC's many small-to-medium-sized acquisitions
over the past year. It is apparent that there is
meaningful incremental EPS growth which should
follow the company's venture into global freight
forwarding, reverse logistics, and truckload.
* USFC is quietly developing an “Internet Play”
angle of its own. This varies from direct e-Commerce
with companies and customers via its new extranet
product which has been recently unveiled, to its
auction website at its Processor's division, similar to
Ebay.com's (EBAY, $186 5/8), to a potential new
relationship with Amazon.com on the home delivery
side.
* While we do not argue for a new valuation
paradigm, clearly, at 11.8x EPS , the shares are
well below levels which we believe are appropriate,
given it's clear vision, and consistent EPS growth.
We believe a price valuation in the mid-$40s for 1999,
and low $50's in 2000 are more appropriate. We
reaffirm our Accumulate/Buy investment opinion.
Key Division Notes:
n LTL Trucking Division
Bob Fasso, President of the LTL carrier group, and Pete
Neydon, President of USF Holland, the company's largest
individual carrier, presented the regional trucking outlook.
The key points in our opinion were the following:
* Core growth and operating margins should
continue on track, and even expand modestly as
some divisions, as market share penetration improves.
Execution has been very solid, and the fastest growing
segment of revenues has been from the company's top
50 customers – a good sign.
* New product development should assist growth
and margins. These include internal products, such
as the rollout of a new extranet service, allowing real-time
tracking and tracing, as well as external products
such as new Mexican service and other expedited
products.
* USF Holland could reach $1 billion in revenues in
2000. In addition, the company's terminal program is
50% complete, and meeting with expected success.
n USF Logistics
USF Logistics President Doug Christensen , presented the
following key points, in our opinion:
* USF's logistics strategy is reaching critical mass,
and beginning to win significant new business at
solid margins. Key recent victories include being
selected as the carrier for all of Proctor & Gamble's
new product launches, and being consulted with by a
number of large Asian companies seeking to lower
supply chain costs.
* New market opportunities are beginning to
surface. USFC has recently been approached by
Amazon.com to determine a cost-effective home-delivery
alternative for larger consumer products.
n Other Divisions
Presidents of Precessors Unlimited, USF Worldwide and
USF Glen Moore also presented, shedding light on
significant EPS growth opportunities:
* Reverse Logistics is a $2 billion industry today,
with larger opportunity. Processors should add
$0.06-$0.09 to EPS in 1999, and it's new internet
auction site has met with success.
* Global Freight Forwarding. 1999 will be a
“putting-it-together” year for forwarding, but we
believe USF will present a formidable product to the
market.
* Truckload. Glen Moore will likely contribute more
to the P&L than we expected, not to mention will
synergize well with USF's other divisions. Look for a
1+1=3 impact with this small, but growing division.
[USFC] MLPF&S was a manager of the most recent public offering of securities of this company within the last three years.
[AMZN, USFC] The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt
from registration or have been qualified for sale. MLPF&S or its affiliates usually make a market in the securities of this company.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
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