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YRC Worldwide, Inc. (YRCW), XPO Logistics Inc (XPO): Identifying the Greatest Upside in the Transport Sector

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Shares of YRC Worldwide, Inc. (NASDAQ:YRCW) have rallied more than 70% in the last two sessions after the company posted earnings that showcased its first operating income in six years. BB&T immediately upgraded shares of the company, and if these operational improvements can continue then there would be great upside in shares of this company. However, I am still not sold that YRCW has the greatest upside in the transportation sector.

A Look at YRC Worldwide & its Lack of Transparency

I’m going to being by saying, YRC Worldwide, Inc. (NASDAQ:YRCW) is deserving of this rally. The company posted operating income of $2.40 million for the quarter, which reflected a mindboggling $58.5 million over last year’s Q1. The company’s CEO James Welch said a number of bullish statements including that there is still significant opportunity for improvements and defended the company’s $36.5 million liquidity decrease by pointing out its operational improvements and working capital management that provides “more than sufficient liquidity.” While it’s unknown when we may see another operating profit, the company’s $2.40 million is a start, and hopefully is a sign of what’s to come.

YRC Worldwide, Inc. (NASDAQ:YRCW)The problem with YRC Worldwide, Inc. (NASDAQ:YRCW) is that at this point we are simply hoping that these improvements continue. The company still has to face the fact that its equipment is older, although CEO Welsh doesn’t “lose a lot of sleep” over aging equipment, and believes their “equipment is decent.” In the conference call, I didn’t like the lack of transparency, as Deutsche Bank analyst Taylor Mulherin asked for details regarding “how” to drive margin expansion, and the company responded by saying, “I won’t go into specifics” among repeating of previous statements regarding its line haul network.

The company really didn’t answer any direct questions regarding future efficiency plans. It seemed as though answers to questions included those such as, “Well, I’d say, we’re just working on it every day,” and what seemed like a favorite from President Jeffery Rogers, “No. I really can’t comment about in-quarter stuff” and “I would just again, reiterate, it’s still rational. Let’s put it that way,” answering a question regarding concerns with second quarter capacity from Stifel, Nicolaus & Co.

I suppose my problem with YRC Worldwide, Inc. (NASDAQ:YRCW) is that the company is so large, with over $4.50 billion in annual revenue, and that it has made so many mistakes in the last few years, but really doesn’t address the key issues moving forward. However, after a long and tedious restructuring effort it is very possible that this is real change occurring before our eyes. When you consider over $4.50 billion in annual revenue and a market cap of just $120 million, there is a great deal of potential upside. Think about it this way, even if the company could create profit margins of just 0.50% it would create net income of almost $25 million, trading at just five times earnings, about 30% of the S&P 500 average. Thus the upside is massive “if” operational improvements continue!

My Choice for Best Value

I am not totally against an investment in YRC Worldwide, Inc. (NASDAQ:YRCW), but I believe it should be small and should not be the focal part of your investment portfolio. My largest single holding is XPO Logistics Inc (NYSE:XPO), and I still like it more than YRC Worldwide as a multi-year investment. I view XPO Logistics as the safer investment. Here are a few reasons that I like XPO more than YRC Worldwide right now.

XPO Logistics is growing at more than 100% year-over-year through acquisitions and cold starts. It has tripled revenue since Bradley Jacobs became the CEO and is still less than 1% of the $50 billion truck brokerage business. YRC Worldwide, Inc. (NASDAQ:YRCW) is losing revenue and commands a much larger piece of its U.S. sector.

In the 14 months prior to February 2013 XPO Logistics Inc (NYSE:XPO) has doubled its locations and has grown headcount from 200 to over 900. Meanwhile YRC Worldwide has laid off workforce and has closed branches of its business.

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