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Missing the mark.

Analysts Were Off On Earnings Projections For Arkansas Freightways Corp.; Here's Why

When Arkansas Freightways Corp. announced its 1991 earnings per share, more than a few eyebrows were raised in the investment community.

The earnings were $1.21 per share, down from $1.33 per share in 1990 and 14 cents below analysts' projections.

When that bit of news hit in late January, the Harrison-based company's stock dropped sharply. It went as low as $27 per share before beginning a climb into the high 30s.

What happened?

Was there a failure to communicate between the company, investors and analysts?

Or did the earnings figures catch everyone, including Arkansas Freightways management, by surprise?

"It happens," one analyst says. "But to miss that much on a local company is embarrassing for the |investment~ firm and not good for the analyst."

Why did Arkansas Freightways fail to live up to projections?

"That's a good question," the analysts says. "... Either the analysts were misled or the company did not do a good job of dealing with analysts."

Actually, say those who follow the trucking industry, Arkansas Freightways was hit by a barrage of cyclical pressures and inherited difficulties. Those difficulties affected fourth-quarter figures.

Following years of success, the latter part of 1991 saw Arkansas Freightways executives forced to deal with:

* The closing of Jones Truck Lines Inc. of Springdale.

* A faltering economy. The recession has been especially difficult on the trucking industry.

* A computer conversion, which partly coincided with Jones' demise.

The Jones Fallout

After Jones went bankrupt July 9, about half of its freight volume was picked up by Arkansas Freightways.

"To handle such a large influx of freight, AF leased trailers for pickup and delivery operations, used truckload carriers for some long-haul freight, paid loads of overtime wages while hiring and training new people, ordered ... equipment to handle the volume of freight and continued the conversion to a mainframe computer," wrote Stephens Inc. trucking analyst Ginanne Long in a recent review of the company.

James Dodd, Arkansas Freightways' chief financial officer, says the company added between 400 and 500 employees during the second half of the year.

The addition of new freight, new people and new terminals made for new headaches.

"It was a difficult operating |fourth~ quarter," Dodd says. "... The general economic environment was not the best in the fourth quarter ... The economy was a little softer than normal."

Freight volumes typically begin to build in August, peak in October and start to decline in late November.

The seasonal decline came as Arkansas Freightways was picking up Jones' accounts.

"You order equipment, and it eventually comes, but you don't get it the next day," an analyst explains. "You hire people to handle the additional |work~, which takes time and training."

"This is a company that has been on a rapid growth track since it opened for business in October of 1982," says Paul Schlesinger of Donaldson Lufkin & Jenrette at New York. "Then, Jones Truck Lines failed. |Because of the extra business~ in the intermediate to long term, Arkansas Freightways should have its profitability enhanced.

"But in the short run, it's very disruptive. It coincided ... with seasonal and cyclical weaknesses in their business. There was a big surge, then a subsidence with the recession and the seasonably slow period.

"They've done a great job with orderly growth. But they've had difficulty with the chaos of the surge."

20/20 Hindsight

That still doesn't explain the big surprise when fourth-quarter figures were released in late January.

"The analysts were just wrong," admits one local broker.

It's similar to a thoroughbred handicapper watching as a long shot upsets an odds-on favorite, says John Barnes, a vice president and financial consultant in the Little Rock office of Shearson Lehman Brothers Inc.

"But a company is more precise in its behavior than a horse," Barnes says. "Analysts' projections are based on a lot of data -- financial background, public documents, past performances of a company and conversations with company officials."

Simply put, analysts did not handicap for an off track.

"My expectations were a bit too high," Schlesinger admits. "The reality is that it was an extraordinarily difficult challenge. All things considered, the company came through with flying colors. It was anything but a routine six months for Arkansas Freightways."

Dodd agrees.

"It was a hard year for anyone to project," he says. "That goes for the trucking industry in general but Arkansas Freightways in particular with our large increase in revenue overnight, the computer conversion and the economy."

Schlesinger's optimism is based on Arkansas Freightways' record of the past decade.

The company went public in March 1989. Under the leadership of Chairman Sheridan Garrison, Arkansas Freightways has delivered little but good news to investors since then.

Two years after going public, Arkansas Freightways had doubled its stock price.

In 1990, an industry publication, Transport Topics, reported that Arkansas Freightways had "outperformed all other trucking companies."

Arkansas Freightways primarily transports less-than-truckload shipments of general commodities, serving all of Alabama, Arkansas, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Texas, Tennessee and the metropolitan areas of Atlanta and Chicago.

A less-than-truckload carrier transports goods for more than one customer during the same haul.

Tough Year For Trucks

During the past two years, about 1,500 trucking firms have gone out of business nationwide.

When Jones filed a Chapter 11 reorganization petition, it had $103 million in debts.

While Arkansas Freightways struggled, J.B. Hunt Transport Services Inc. of Lowell announced a slight increase in net income for fiscal 1991. J.B. Hunt saw revenues increase 25 percent over 1990 figures. Net earnings per share were $1.30, compared with $1.28 per share in 1990. The gains were small but consistent with predictions, analysts say.

What does the future hold for Arkansas Freightways?

In a recent Wall Street Journal story on top over-the-counter performers, Arkansas Freightways was mentioned by money manager Elizabeth Dater of E.M. Warbur Pincus & Co. of New York as a stock to watch. Arkansas Freightways' earnings are expected to grow by about 20 percent annually, Dater says.

The over-the-counter market is the market in which transactions are conducted through a telephone and computer network rather than on the floor of an exchange.

Many companies that qualify for an exchange listing choose to continue over-the-counter trading because they feel the system of multiple trading is preferable to centralized trading.

Dater estimates 1992 earnings of $1.82 per share for Arkansas Freightways. Other estimates range from $1.75 to $2.10.

The company's stock underwent a 2-for-1 split last week after closing strongly at 37 1/2. It reopened at $18.75 per share.

Schlesinger and Long recommend the stock as a buy.

"We believe this is a unique company, built to take advantage of deregulation, and that it will continue to impress us as it grows," Long wrote. "Although some investors may stay on the sidelines until the company proves once again its ability to manage, we believe this often presents opportunities to more aggressive investors."

Schlesinger is a bit more cautious.

"Arkansas Freightways has to reassure its customers and, in the process, its investors that it deserves the luster its record afforded it and show that it can function as a larger company," he says. "We believe it will meet those tests in 1992."
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Title Annotation:analysts' forecasts of Arkansas Freightways Corp.'s earnings fall short of actual earnings
Author:Webb, Kane
Publication:Arkansas Business
Date:Mar 16, 1992
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