SAIA - Old Dominion Freight Line: Punished Unjustly For Outperformance

2023-10-26 08:21:38 ET

Summary

• Old Dominion Freight Line's shares dropped by 3.9% despite exceeding revenue and profit expectations.
• The company reported a decline in revenue and earnings compared to the previous year, but still outperformed analysts' forecasts.
• Old Dominion Freight Line is considered pricey compared to similar firms, but its strong financial position and high-quality operation make it a favorable prospect to consider.

For investors more generally, October 25 ended up proving to be a rather painful day. But there were some companies that had worse performance than others. One great example can be seen by looking at freight transportation company Old Dominion Freight Line (ODFL). Despite exceeding analysts' expectations when it came to both revenue and profits, shares of the company pulled back, dropping by 3.9%. Some of this downside might be due not only to the market, but also to the fact that, relative to similar firms, shares are quite pricey. But when you look at just how high quality the operation is and the fact that, despite weakening results year over year, it should still generate a significant amount of cash flow this year, I do believe that a 'buy' rating still makes sense.

Solid results

When it comes to fundamental performance, there are two different ways that we can look at the picture. The first is through the absolute lens, which pays attention to financial performance relative to what the company achieved the year prior. And the second looks at financial performance relative to what analysts expect. There are upsides and downsides to both approaches. For instance, during the third quarter of its 2023 fiscal year , Old Dominion Freight Line managed to report revenue of $1.52 billion. This is negative in the sense that it represents a decline of 5.5% compared to the $1.60 billion generated one year earlier.

This revenue decline was driven by a couple of key factors. For instance, the total number of LTL tons shipped during the quarter came in at 2,342. That was 8.4% lower than the 2,556 LTL tons shipped the same time last year. Part of this decline was driven by a 4.4% drop in shipments, with some of that decline offset by a 3.1% increase in revenue per hundredweight and an 8.9% increase in revenue per hundredweight if we exclude fuel surcharges from the equation. Although this looks bad, and it certainly is not good, the revenue reported by management did actually come in $10 million higher than what analysts anticipated. So on a relative basis, this quarter was a win for the company and its investors.

On the bottom line, we had a rather similar picture. Earnings per share came in at $3.09. That compares to the $3.36 reported one year earlier. Although this decline is not great to see, management still succeeded in reporting results that were stronger than what analysts anticipated to the tune of $0.17 per share. All said and done, the company went from reporting $377.4 million in net profits in the third quarter of last year to $339.3 million the same time this year. Other profitability metrics followed a similar trajectory. Operating cash flow dropped from $514.1 million to $429.2 million, while EBITDA for the company fell from $564.4 million to $529.1 million. It should be expected that, as revenue for an asset-intensive industry declines, profits should also fall. So none of this is any surprise to me.

As you can see in the chart above, this financial performance follows a trend of weakness that the company has seen so far this year. Revenue, profits, and cash flows are all down year over year. And this really is just because of industry weakness. This isn't to say that everything was bad. Management did comment that the number of shipments per day for the most recent quarter totaled 49,670. That's actually up from the 47,077 per day reported for the first half of 2023. This suggests that some improvement in demand for the company's services is on the horizon compared to what was seen earlier this year. Unfortunately, we still don't know what to expect for the rest of the year as a whole. But if we annualize results seen so far, we should expect net income of just under $1.20 billion, adjusted operating cash flow of $1.44 billion, and EBITDA of $1.91 billion.

Using those data points, I then created the chart above. As you can see, the stock does look more expensive on a forward basis compared to if we use data from 2022. In both cases, shares are not exactly cheap. In fact, I would argue that the company is quite pricey at this time. Relative to similar firms, this is also the case. In the table below, you can see that I valued it compared to five similar firms. Using the price to earnings approach and the EV to EBITDA approach, I found that four of the five companies are cheaper than Old Dominion Freight Line. And when it comes to the price to operating cash flow approach, our prospect is the most expensive of the group.

Given this recent weakness and how pricey shares of Old Dominion Freight Line are on both an absolute basis and relative to similar firms, you might be surprised to hear me say that I am bullish about the company. As I talked about in a prior article that was published back in August, there is reason to believe that there is a catalyst that could help the company to pick up quality assets on the cheap. And because it has cash in excess of debt that totals $126.6 million, it is in a great financial position to capitalize on any opportunities that are out there. But even outside of that, there are reasons why a value investor like myself would be drawn by an expensive company.

At the end of the day, the goal was not necessarily to pick up cheap stocks. It's to pick up shares of companies at a discount to their intrinsic value. This can even mean buying stocks that are pricey so long as the quality that you are receiving in return is top notch. As part of the analysis for this article, I decided to take those same five firms and to compare Old Dominion Freight Line to them using six different metrics. The results can be seen in the table below.

As you can see from the table, there are some areas in which similar companies have outperformed Old Dominion Freight Line. For instance, over the past five years, revenue generated by our prospect has risen by 86.4%. This trails four of the five competitors that I stacked it up against. Similarly, we have operating cash flow. It expanded by 215.4% over the past five years. While impressive, two of the five companies I compared it to saw growth rates exceeding this. Even so, this particular position is not awful. But where we get some really exciting data is when it comes down to margins. The operating cash flow margin, the net profit margin, and the return on assets, all favored Old Dominion Freight Line, while when it came to return on equity our prospect came in second place. The company generates profits off of its assets and off of its revenue that comfortably exceeds what any of its peers have done. It's this kind of quality that often deserves a premium in what is traditionally a very competitive and low margin market.

Takeaway

At this time, I understand that market participants are a bit cautious. I understand that and I do believe that most industries could experience weakness over the next few quarters. But this doesn't mean necessarily that investors should run for the hills. The fact of the matter is that while financial performance for Old Dominion Freight Line was down year over year, it exceeded analysts' forecasts. The company's balance sheet is robust and it has a financial track record that places it at the very top in its space relative to similar firms. Given these factors, I do believe that anybody with a long-term outlook should view the company favorably. And because of that, I've decided to keep it rated a 'buy' for now.

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