Con-way plans 5 million share offering
Con-way Inc. has issued nearly 5 million new shares of company stock, a move likely aimed at funding the purchase of
new trucking equipment but one criticized by some analysts
concerned that the public offering dilutes the company’s
value and may signal uncertainty about its outlook.
The trucking and logistics company offered to the public
4. 3 million shares and gave the deal’s underwriters an
option to buy 645,000 additional shares. The offering in
total would result in a nearly 10-percent increase in Con-way’s current share base of about 50 million.
Proceeds from the offering, which was priced at $35 a
share on May 13, would be used for “general corporate purposes,” the company said in a statement. It declined further
comment.
Analysts at JPMorgan Chase said the
funds would probably be used to modernize the company’s truck fleet, notably
the equipment operated by its truckload
division, Con-way Truckload.
Vehicles in the company’s truckload
fleet average 3. 16 years of age, higher
than the ideal average age of two years,
according to Morgan analysts. The analysts estimate that vehicles in Con-way’s
less-than-truckload fleet average about
five years of age.
“Our sense is that with the company’s
average fleet ages having moved meaningfully beyond the level that Con-way
views as optimal, the cost/benefit trade-off of higher maintenance cost versus
deferred capital outlay for new equipment is now less attractive,” the analysts
said in a research note.
However, Con-way’s decision to issue new shares to fund
the purchases—rather than using $280 million in cash
reserves or adding debt to what is considered a low-lever-aged balance sheet—didn’t sit well with the Morgan analysts. In the note, they speculated that the company’s conservative financing strategy might reflect caution over the
current operating environment. Its choice to issue new
equity “signals to us some uncertainty in the outlook,”
Morgan said.
Investors didn’t take the news positively. Con-way stock has
been trending lower since the announcement, closing May 20
at $31.79 a share amid a generally weak equity market.
their fleets to prepare for rising freight volumes as the U.S.
economy recovers. During the severe freight recession of
the past four years, truckers have either been reducing
capacity or keeping older equipment longer than they
would have if volumes were stronger.
For example, J.B. Hunt Transport Services Inc., a leading
truckload and intermodal service provider, announced last
month it would buy more than 5,000 Navistar Inc. trucks
over the next five years. Besides being a sign that truckers
are starting to ante up for new equipment, the deal is significant in that the power units will meet the federal government’s stricter engine emission standards that took
effect on Jan. 1. Many carriers were either holding off on
new rig orders or had placed orders
before the Jan. 1 deadline to avoid paying higher prices for vehicles equipped
with engines in compliance with the
tougher rules set by the Environmental
Protection Agency.
Lowell, Ark.-based Hunt currently has
9,000 power units in its fleet. It is
unclear how many of the new rigs will
serve as replacements for older equipment. A Hunt spokeswoman did not
respond to a request for comment.
Orders such as the one placed by Hunt
“suggest that the economic rebound and
improved freight volumes are sustainable and tightening capacity will lead to
improved profitability,” said Ken Vieth,
partner and senior analyst at ACT
Research Co., a Columbus, Ind.-based
truck research concern.
ACT has raised its projection for 2010 heavy-duty, or
Class 8, truck production, increasing its estimates by 6,000
units, a 19-percent year-over-year increase. ACT also boosted its 2011 forecast by 3,000 units, a 67-percent increase
over 2010 projected levels.
“The deck remains tilted against a strong ramp-up of
Class 8 production in 2010 as the projected growth is still
well below replacement level demand,” said John Burton,
ACT’s vice president - transport, in a statement.
Burton added, however, that the aging of many fleets has
truckers “increasingly making comments” about upgrades.
In addition, Burton said that the reserve capacity of many
fleets is low after those fleets were effectively cannibalized
during the prolonged downturn.
ACT has said previously that 2011 will be a banner year
for equipment production and orders as a strengthening
economy and a continuing tightening of capacity set the
stage for a strong increase in demand.
Out with the old?
Should Con-way use the offering’s proceeds to fund
equipment investments, it would be another sign that
trucking companies are looking to add to or modernize
