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CNW AT A GLANCE

P/E ► -9.62   EV/EBITDA ► 49.5 VERY HIGH ROA ► -3.4% AVG ROE ► -17.2% AVG Debt to Equity ► 2.96 HIGH Current Ratio ► 1.32 AVG Interest Coverage Ratio ► -1.94 AVG

 

 

 

 

 

 

Con-way Inc. provides truckload (1.7% of revenue) and less-than-truckload (68%) shipping services for retail, industrial, and government customers. Con-way's customers typically don't have a full truckload of goods, and the firm consolidates shipments at a central location before sending the goods on the road. Con-way also has a secondary logistics business - managing product transportation, storage, delivery, and other supply-chain details - and while this business is smaller and less profitable than freight (31% of revenues and 10% of operating margin) Con-way is looking to grow its presence in this sector and expanded into Asia by acquiring logistics companies in both Singapore and China.^[1]

Because Con-way is a nonunion freight carrier, its workers can do several different jobs when they transport goods, differentiating CNW from their unionized competitors who must hire a separate person to perform each task. This allows Con-way to operate at lower costs and higher margins than its competitors.

Like others in the competitive trucking and logistic industry, Con-way's revenues are closely tied to the overall health of the economy. Con-way faces challenges from rising oil prices and increased government regulations, as well as the possibility of recession in the wake of the ongoing financial crisis in early 2008.^[2] Another challenge Con-way must answer is the entry of shipping giants FedEx and UPS into the less-than-truckload shipping business, traditionally Con-way's strength - these firms bring huge resource bases and strong brand names into this market.

Business Overview

Con-way provides a variety of transportation services. The company charges shipping rates, which typically include a fuel surcharge, to transport goods. The transportation and logistics company also makes money by offering supply-chain management and logistics consulting. Con-way operates in over 17 countries, but 96.5% of revenue is generated in the United States^[3].

Operating Segments

Con-way's business can be divided into four main operating segments.

1. Con-way Freight: With over 460 North American operating locations, Freight provides comprehensive less-than-truckload services throughout the continental U.S. and Canada as well as in Hawaii, Alaska, Puerto Rico, and Mexico. In addition, Con-Way can ship goods for customers from ports located in China, Korea, Singapore, Japan, and Taiwan to U.S. destinations with a day-definite guarantee^[4]. Customers pay Con-way for shipments, which typically weigh 100-15,000 pounds. Con-way picks up shipments from customers and consolidates these less-than-truckload shipments at the originating service center. From there, goods are routed to a destination service center, where they are shipped to the final destination^[5]. This process is asset-intensive, because Con-way needs to operate several trucks and service facilities. Con-way Freight uses over 8,000 tractors and 24,000 trailers to achieve its 98% on-time performance^[6].
2. Con-way Truckload and CFI: Using 37 sales centers and over 460 North American operating locations, Con-Way Truckload provides local, regional, and transcontinental truckload transportation services to customers in Canada, the United States, and Mexico. With over 10,000 company-owned tractors and trailers dedicated to truckload services, Con-way can do same-day pick-up and also allow clients access to dry van, intermodal, and flatbed services^[7]. Con-way acquired Contract Freighters Inc., CFI, in August of 2007 in order to increase the truckload division. The acquisition gave Con-way an additional 2,600 carriers^[8].
3. Menlo Worldwide (Logistics): This logistics branch of Con-way Inc. provides supply chain management to customers in over 17 countries and span 5 continents. Customers pay Con-way for consulting and/or engineering of supply-chain management. These customers go to Con-way in hopes of reducing costs in transportation, inventory, and order fulfillment. Menlo Worldwide develops, implements, and manages the movement of raw materials to finished goods for businesses^[9]. Menlo's four biggest clients accounted for 47.8% of its revenue in 2006^[10]. Menlo Worldwide usually utilizes third-party transportation providers for customer's shipping needs^[11]
4. Other: Other includes the subsidiary Road Systems, which manufacturers and refurbishes trailers for Con-way Freight and Con-way Truckload, and any corporate activities that do not fall into any of the prior categories^[12].

Revenue Generated by Segments

The following bar graph shows revenue and operating income for each of the four operating segments. In addition to the four covered in Operating Segments, a 5th segment called Vector is shown. Vector, formally part of the Menlo Worldwide segment, was sold to General Motors (GM) in December of 2006^[13].

Revenue by Segment^[14]

Operating Income by Segment^[15]

Overall, revenues and operating income decreased. The acquisition of CFI helped boost revenue. Excluding the acquisition, total revenue was down 1.1% for the first nine months of 2007 compared to 2006. Management cites an unfavorable transition to less profitable shipping methods and higher employee costs as reasons for the decline in income^[16].

Overall Financials

Over the past three fiscal years, Con-way achieve higher net revenues and operating income. Between 2005 and 2006, Con-way used a higher yielding mix of transportation services to generate a 2.6% increase in revenue, even though total tonage-per-day dropped 0.5%. The company also benefited from higher demand for its warehousing operations. The sale of Vector and Con-way Expedite boosted operating income 8.8%. Excluding these sales, operating income would have decreased 4.4% from 2005 to 2006. Financials improved in 2005 from 2004 as overall demand for freight and logistics grew. Total weight per day shipped increased 12.4%^[18].

Rebranding

In 2006, the company decided to rebrand itself from CNF, Inc. to Con-way Inc. Management spent $1.8 million in 2006, and expects to charge another $20-$24 million in order to rebrand its trucking fleet and facilities to the "bold, new signature Con-way brands and colors."^[19]

Acquisitions & Dispositions

Con-way has made several purchases and dispositions of companies and business segments over the past couple years.

Dispositions

In 2006, the company closed Con-way forwarding as management said the business was commoditized by high-service regional trucking. Con-way also dropped Con-way Expedite, because management felt that the industry was highly cyclical and offered little growth potential. General Motors (GM) exercised its call option to purchase Con-way membership interest in Vector.^[20]

Acquisitions

On August 23, 2007, Con-way purchased Contract Freighters, Inc. By purchasing the asset-based full-truckload service company, Con-way added 2,300 tractors, more than 7,000 trailers, and 2,500 drivers. The acquisition allows Con-way to offer a better suite of solutions. The full-truckload service complements Con-way's LTL and logistics business segments. On September 5, 2007, Con-way bought Singapore-headquartered Cougar Express Logistics. This addition expands Menlo Logisitic's presence rapidly growing Asian-Pacific markets. Likewise, the purchase of Chic Logisitics, a Chinese transportation-management service company, in October of 2007 should also benefit Menlo's business operations in Asia^[21].

Restructuring

In August 2007, Con-way announced a restructuring initiative to combine its three regional operating companies into one centralized business. Management expects the restructuring to benefit customer service and improve efficiency by streamlining processes^[22].

Key Trends and Forces

• Sensitivity to Economic Conditions: The trucking industry is closely tied to U.S. economic cycles and is particularly vulnerable to fluctuations in the manufacturing and retail sectors. This correlation between economic growth and trucking profits is due to basic supply and demand economics, since customers typically use a bidding system, which tends to keep prices fairly competitive; when shipping volume decreases in a weakening economy with supply held constant, then prices usually decrease. The blue line in the 'TSI Image' shows the Transportation Service Index. The Index measures the movement of freight. As one can see, during weaker GDP periods (early 90's, 1995, and 2000-01), total freight shipments were down to flat. With 96.5% of its revenues coming in the United States, a recession of the U.S. economy could be very bad news for Con-way.

• Government Regulations: Con-way must follow regulations set forth by the US Department of Transportation and Homeland Security, along with the Environmental Protection Agency (EPA). Con-way ships some goods with a guarantee on shipping time. Further restrictions on the industry could potentially disrupt their shipping times and negatively effect business relationships, and the U.S. government's continued response to terrorist threats could lead to more restrictions and guidelines for the transportation industry. In addition, the EPA requires a progressive decrease in diesel truck emissions through 2010 due to environmental concerns. These regulations could lead to higher fuel, trucks, and maintenance expenses. Hours-on-service (HOS) laws govern interstate trucking and regulate the number of hours a truck driver can work. In 2005, the U.S. Federal Motor Carrier Safety Administration said a worker cannot drive more than 11 hours after being off-duty for 10 hours. Also, a commercial motor vehicle (CMV) driver cannot exceed 60/70 hours in a 7/8 day period^[24].

• Fuel Expenses: Con-way, along with its peers in the trucking industry, are relatively shielded from changes in fuel prices, because of a generally accepted fuel surcharge system, in which customers agree to pay established shipping rates plus or minus a change in diesel prices. However, if diesel prices continue to increase, it may be harder for the trucking industry to continue its practice of applying the expense to their customers.

• Con-way's Model depends on a Non-union Workforce. Con-way's business model revolves around the flexibility of its non-union workforce, who can perform a variety of functions in the supply chain. This is different from other transportation companies that are beholden to union regulations that restrict work hours and job functions. If Con-way's workers were to grow discontent and organize into a union, this would lead to new restrictions on the firm's operating model and erode its competitive advantage.

• The entry of FedEx and UPS into LTL Shipping Poses a Significant Threat to Con-way. The two giants of global shipping, FedEx and UPS, announced in 2005 that they would enter the less-than-truckload shipping business. While Con-way's proven track record offers it a short-term advantage over these competitors in the LTL sector, in the long term UPS and FedEx have greater resources and proven infrastructures to devote to this efficient form of shipping. However, some industry analysts feel that UPS and FedEx will compete most heavily with each other, in terms of clients and in business models, and this could leave Con-way to its existing economic niche.^[25] In addition, Con-way's expansion of its logistics operations in China and Singapore indicate the firm's willingness to explore alternative options and markets in order to remain competitive.

• Ongoing Capital Expenses: The LTL and truckload businesses require maintenance and leasing payments of operational facilities, in addition to truck and freight expenses. If cash flow from operations were to decrease, or if facilities and equipment costs were to rise significantly, Con-way would need to seek outside financing in order to pay reoccurring capital expenses. In turn, this leverage could be expensive if interest rates are high. Depreciation expense was $356 million in 2006 and interest expense was $34 million^[26].

Competition

Con-way competes with a range of regional, national, and global transportation and logisitics company.

Transportation of Goods

Con-way's Freight and Truckload divisions compete primarily with FedEx Freight and YRC Worldwide (YRCW). The national LTL freight service has seen consolidation and liquidation, but remains competitive. This part of industry has seen the least growth, but also involves high barrier to entry. Capital expenses needed to build sorting facilities and operate trucks involve substantial capital contribution. At the regional level, Con-way competes with a wide selection of transportation businesses. The larger competitors are Arkansas Best (ABFS), Old Dominion Freight Line (ODFL), and Saia (SAIA), but there are also entities that only own a few trucks and operate as a for-hire contractor. The asset-based model still requires large expenses to operate facilities but less than the national scale. Transportation companies typically compete based on freight prices, service, reliability, transit times, and scope of operations^[27].

Market Share

The following table shows 20 of the largest Truckload and Less-than-Truckload companies. Some companies are a subsidiary of a larger corporation. For instance, FedEx Freight is owned by FedEx (FDX). Further, several of the listed companies earn a portion of revenues outside of transporting goods, such as warehousing and logisitics. These instances usually account for less than 10% of the total sales. Total revenue estimates for the trucking industry is $255.5 billion^[28]

Comparing Truckload and Less-than-Truckload Companies^[29]

Logistic Services

Menlo Logistics operates against companies such as Catepillar Logistics and YRC Logistics. The industry is generally less capital intensive and priority is placed on the technological solutions offered by the firms. Con-way's size allows it to service large customers, which only a handful of logistics companies are capable of performing^[30].

Overall, the trucking industry tends to see periodic price decreases by firms, which try to capture extra business. Moreover, many customers use a bidding system, which tend to keep prices fairly competitive. For instance, Wal-Mart Stores (WMT) needs freight shipped, so asks several shipping firms to submit how much payment they are willing to accept. The lowest bid usually wins the contract.

Con-way believes it can differentiate its services by more than just price. Management plans to focus on its large capacity and density of coverage, along with its high service standards, in order to win customers and expand freight services. Moreover, Menlo logistics should be service large and complex needs of big customers that smaller firms may not be able to handle. Furthermore, Con-way continues to see expansion of logistic services outside of North America^[31].

References

1. ↑ Con-way Website
2. ↑ Con-way (CNW) Form 10-K, Fiscal Year 2006, "Risk Factors", Page 8
3. ↑ Con-way (CNW) Form 10-K, "Geographic Data", Page 76
4. ↑ Con-way Website
5. ↑ Con-way (CNW) Form 10-K, Fiscal Year 2006, "Reporting Segments", Page 4
6. ↑ Con-way Website
7. ↑ Con-way Website
8. ↑ Con-way (CNW) Form 10-Q, Fiscal Year 2007 3rd Quarter, "Acquisitions", Page 10-11
9. ↑ Con-way Website
10. ↑ Con-way (CNW) Form 10-K, Fiscal Year 2006, "Menlo Worldwide", Page 6
11. ↑ Con-way (CNW) Form 10-Q, FY 2007 3rd Quarter, "Overview of Business", Page 22
12. ↑ Conway (CNW) Form 10-Q, Fiscal Year 2007 3rd Quarter, "Segment Reporting", Page 14
13. ↑ Conway (CNW) Form 10-Q, Fiscal Year 2007 3rd Quarter, "Segment Reporting", Page 14
14. ↑ Con-way (CNW) Form 10-Q, Fiscal Year 2007 3rd Quater, "Segment Reporting", Page 15
15. ↑ Con-way (CNW) Form 10-Q, Fiscal Year 2007 3rd Quarter, "Segment Reporting", Page 15
16. ↑ Con-way (CNW) Form 10-K, Fiscal Year 2006, "Results of Operations", Page 23
17. ↑ Con-way (CNW) Form 10-K, Fiscal Year 2006 "Statements of Consolidated Operations", Page 40
18. ↑ Con-Way (CNW) Form 10-K, Fiscal Year 2006, "Overview", Page 20
19. ↑ Con-Way (CNW) Form 10-K, Fiscal Year 2006, "Overview", Page 20
20. ↑ Con-Way (CNW) Form 10-K, Fiscal Year 2006, "Con-Way Forwarding", Page 51-52
21. ↑ Con-Way (CNW) Form 10-Q, 3rd Quarter Fiscal Year 2007, "Acquisitions", Page 10-11
22. ↑ Con-Way (CNW) Form 10-Q, 3rd Quarter Fiscal Year 2007, "Restructuring Activities", Page 11
23. ↑ Bureau of Transportation Statistics
24. ↑ US Federal Motor Carrier Safety Administration
25. ↑ Bnet.com, July 2005
26. ↑ Con-way (CNW) Form 10-K, FY 2006, "Consolidated Operations", Page 40
27. ↑ Con-way (CNW) Form 10-K, Fiscal Year 2006, "Competition", Page 4
28. ↑ Truckinfo.net
29. ↑ Hoovers
30. ↑ Con-way (CNW) Form 10-K, Fiscal Year 2006, "Competition", Page 6
31. ↑ Con-way (CNW) Form 10-K, Fiscal Year 2006, "Letter from CEO"