ODFL - Old Dominion Freight Line: Hold Current Momentum Carries A Potential Upside

2023-07-06 13:19:34 ET

Summary

• Old Dominion Freight Line, a North American less-than-truckload motor carrier, has seen a 42% increase in share price over the past year due to service efficiency and extensive geographic coverage.
• Despite a 3.7% decline in revenue due to a decrease in LTL tonnage, ODFL has maintained a disciplined approach to managing costs and discretionary spending, resulting in solid financial performance.
• The company is currently trading at a premium, making it overvalued for potential investors, but existing investors are advised to hold and cash out when the current momentum cools.

Investment Thesis

Old Dominion Freight Line ( ODFL ) is one of the largest North American less-than-truckload ("LTL") motor carriers and provides regional, inter-regional, and national LTL services. In one year, the company's share price gained nearly 42%. The significant performance is attributable to its value proposition, a legacy of service efficiency at a fair price. The transit time is generally faster and more reliable than competitors, partly because of the more efficient service center network (256 service centers) and proprietary technology with which customers track their freight. In addition, ODFL has more extensive geographic coverage than most of its regional competitors. The diversified mix and scope of regional, inter-regional, and national LTL service, combined with value-added service offerings including container drayage, truckload brokerage, and supply chain consulting, enables the company to provide customers with a single source to meet their shipping and logistics needs. Quality customer service maximizes on-time performance and minimizes cargo claims. However, given its current valuation, I rate it a sell since it's trading at a premium price.

The Industry Outlook

The trucking industry consists of two main types of motor carriers: LTL and truckload. LTL freight carriers pick up multiple shipments from multiple customers and route them through a network of service centers. LTL carriers require a more extensive "pickup and delivery" network of P&D service centers and breakbulk facilities. In contrast, truckload carriers dedicate an entire truck to a single customer from origin to destination.

North America's less-than-truckload ((LTL)) market is estimated to grow at a CAGR of 7% between 2022 and 2027. The market size is further forecast to increase by nearly $103 billion. The significant trend presents opportunities to expand the company to new geographical areas, increase the potential for rapid financial growth, and benefit the company's existing operations through a more significant market share.

In addition, last-mile logistics is also an emerging trend in the market, focusing on delivering items to customers as quickly as possible. The market is projected to grow steadily due to the growth of e-retailing and the adoption of premium delivery services. Online purchases delivered to customers' doorsteps are gaining popularity over physical shopping due to their convenience and time-saving benefits, fueling demand for last-mile delivery services. Customers are willing to pay a premium charge for same-day or instant delivery of ordered goods and merchandise. The trends depict that ODFL is well-positioned to benefit from prospects.

ODFL's Value Proposition

Deliver superior on-time service

The company operates 256 service center locations in 48 states. The service centers are responsible for freight pickup and delivery ("P&D") within their local service area. Service centers load outbound freight each night for delivery to other service centers. Inbound freight received by the service center in the evening or during the night is generally scheduled for local delivery the next business day unless a customer requests a different delivery schedule. The management constantly reviews the productivity and service performance of each service center daily to help ensure quality service and efficient operations. ODFL's service centers are strategically located throughout the country to provide the highest quality service and minimize freight rehandling costs. Notably, on-time service has improved from 94% in 2002 to 99% in 2022 .

Supply chain efficiency

As the complexity and speed of today's supply chains continue to evolve, accurate and timely access to data becomes more and more critical. ODFL invests approximately $12 million into technology annually, enhancing efficiency and security throughout the operations by building transparency and access to customer shipping data, such as freight tracking, shipping documents, rate quotes, rate databases, and account activity.

The IT infrastructure ranges from advanced truck telematics to state-of-the-art load planning and routing systems. The technology tracks freight to move most securely and efficiently to their customer. The company's web- and app-based customer portals provide resources, tools, and shipping access, dramatically reducing cargo claims. The Cargo claims ratio declined significantly over the years to 0.1% in 2022 , as illustrated below.

In that regard, ODFL received the MASTIO award for its premium service for 13 consecutive straight years.

Dividend Payment

ODFL's dividend payments per share are an average of 44% over the past year, 38% over the past three years, and 35% over the past five years.

The company's payout ratio is nearly 11%, translating to 11% of ODFL's earnings paid out as dividends. A low payout ratio may indicate that the company has a strong financial position and can invest in growth opportunities. In contrast, a high payout ratio may indicate that the company returns most of its earnings to shareholders. ODFL's annual dividend is $1.60 per share, or the total dividends paid to shareholders annually.

The company pays quarterly dividends and has increased them for five consecutive years. Flagging is a positive sign of the company's financial stability and ability to deliver consistent dividends in the future.

Financials

MRQ ODFL's registered a revenue amounting to $1.4 billion, a 3.7% decline, due to an approximately 12% decrease in LTL tonnage reflecting the ongoing softness in the domestic economy and the challenging operating environment. The volume reduction was largely due to some shippers having fewer shipments than normal due to the economy. During the quarter, ODFL maintained a disciplined approach to managing variable costs and discretionary spending to protect profitability levels. The operating ratio of 73.4% was higher than 72.9% in the same period as the previous year. Suggesting it costs 73% of the total revenues to operate. The slight deterioration in the operating ratio contributed to the 0.8% decrease in earnings per diluted share to $2.58 for the quarter. Earnings per share are expected to grow by 5.6% annually and 6% in the next three years. Moving to the balance sheet analysis, the company has exhibited solid performance. ODFL's total assets and liabilities are nearly $5 billion and $1.2 billion, respectively, meaning the company is financially stable. Additionally, its total debt of almost $1 billion and equity of $3.75 billion amount to a debt-to-equity ratio of 2.7%, which I consider deleveraged. Thus, the company is reasonably using its debt. The debt is well covered by its operating cash flow at 1718%.

Further, its average operational expenses in the last three quarters were 168 million, significantly below its cash position of 232 million. Thus, the company can cover its total expenditures in the next quarter. I'm thrilled with the solid financial performance despite macroeconomic headwinds.

Valuation

Based on the relative valuation metrics, the company is trading at a premium compared to its industry median. Nearly all its valuation metrics are above the industry median. In my view, I think the market is rewarding the company's solid fundamentals and financial stability.

Given the above valuation, it is not the best moment to enter the company for potential investors since it is relatively overvalued. The company's legacy performance over the decades and intriguing position in the industry may be exploited to offer an opportunity to existing investors. In addition, ODFL's three-month momentum of 10% is higher than the S&P 500 of 8%, and its six-month momentum of 30.21% is higher than the industry median of 12.28%. Based on the analysis, I advise existing investors to hold, enjoy the potential upside, and cash out when the current momentum cools.

Conclusion

I rate the stock a hold as I believe ODFL's premium valuation adequately justifies its solid operating metrics and long-term execution, offset by the declining volume trends. In my view, the current momentum carries signals a potential upside that justifies a hold rating for existing investors until the momentum cools.

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