YRC Worldwide Inc (YRCW)

[MagicCap]

Some investors get scared off by the dilution factor from convertible notes. The dilution factor is an issue and there have been conversions (just read the "Conversions" section on the 10k). This is diluting the stock. However, I don't think it's all negative. There is $24 million in annual interest expense tied to these convertible notes that will go away, which would improve earnings by over $1 per share (fully diluted). That's huge and something people should definitely keep in mind.

And the conversions will provide enough liquidity to allow larger investors to get in. If they can get back to breakeven or better by Q2 or Q3 institutions will have better comfort with the stock and with the conversions occurring the stock should rise because the earnings boost will offset the dilution. It will just take time.

Any way you slice it though the stock looks incredibly cheap on a fully diluted share count. They will have about 21 million shares after all conversions. That means the company is worth about $130 million right now fully diluted. I've posted before that I think they can do $0.40 to $0.50 EPS by Q3 after factoring in some conversions (i.e., lower interest expense) and some reductions in their network expenses. There is no way the market is pricing this in.

If you take the full benefit of lower interest expenses from conversions and lower costs from the network improvements into account and adjust for modest top line growth of 4-5% (analysts are projecting 10%) and margins of 67%, you could easily project $3 EPS, fully diluted, for 2014. What do you think the stock would trade for then? It certainly won't be $7 per share.