2023-12-16 00:08:58 ET
Summary
- Landstar System recently reported better-than-expected EPS, a new special dividend, and increased stock repurchases.
- The company's focus on digital tools for agents and lower SG&A costs may attract stock demand.
- Risks include reliance on independent agents and lower demand for transportation services, but the stock may be undervalued.
Landstar System, Inc. (LSTR) recently delivered better-than-expected EPS, a new special dividend, and more stock repurchases. With 14.87% dividend growth rate, recent lower SG&A costs, and new digital tools implemented for the company's agents, LSTR may soon receive stock demand. There are obvious risks from reliance on independent commission agents and third-party capacity providers as well as lower demand for transportation services. With that, Landstar System could be trading at richer valuations.
Landstar
Landstar is a leading transportation management company, operating primarily in the United States, Canada, and Mexico as well as between these countries and other international destinations. Its wide range of transportation services includes the organization of individual cargo shipments as well as comprehensive logistics solutions to meet the specific needs of its clients.
The company has a network of more than 1,100 independent commission agents and more than 108,000 third-party capacity providers, primarily truck capacity providers, united by a series of advanced digital technologies. Landstar's services focus on security, information coordination, and customer service, making it an attractive option for customers around the world.
Landstar's business model deals with the marketing of integrated transportation management solutions through independent sales agents and the exclusive use of third-party capacity providers to transport customer freight. The company operates in North America, and has a network of capacity providers, including independent contractors, trucking companies, air, ocean, and rail freight carriers. Through this network linked by digital technologies, Landstar provides transportation management solutions for its clients, and reports results from two operating segments: transportation logistics and insurance.
In the last quarterly report , management reported better-than-expected EPS GAAP, close to $1.71, and lower than expected quarterly net sales. Market participants reacted well to the news. The stock price increased from the level of $156-$170 per share to more than $180 per share. Given the beneficial reaction of the market, I decided to take a look at the valuation of the company.
Balance Sheet: The Company Reports A Significant Amount Of Cash
Landstar reported cash and cash equivalents worth $439 million, short-term investments of about $57 million, trade accounts receivable close to $810 million, and total current assets of $1.395 billion. The ratio of total current assets/total current liabilities is larger than 2x, so I do not really think that there is a liquidity problem here.
Goodwill is rather small, close to $41 million, so I do not really expect a lot of inorganic growth. Total assets stood at close to $1.852 billion, and the asset/liability ratio is close to 2x-3x. I believe that the balance sheet is quite solid.
The list of liabilities does not seem worrying because Landstar reports a significant amount of accounts payable, close to $464 million. Providers seem to be offering financing to Landstar. As a result, the company does not need a lot of debt financing. Current maturities of long-term debt stand at close to $29 million, with insurance claims of $45 million and long-term debt, excluding current maturities of about $46 million.
Share Repurchases, Double Digit ROE, And Recent Special Dividend May Capture The Attention Of New Investors
Landstar continues to report share repurchases, which I believe could bring stock demand in the coming quarters, and enhance the stock price.
In this regard, it is worth noting that the management, recently, increased the number of shares available to repurchase, and offered a special dividend payable in January. With close to 9 years of dividend growth and 14.87% growth rate in the last five years, Landstar does seem to care about making meaningful distributions to shareholders.
Its Board of Directors increased the number of shares of its common stock that the Company is authorized to purchase under its stock purchase program to 3,000,000. The increase to the share purchase program reflects a new authorization to purchase 319,332 shares of Landstar System common stock in addition to the remaining capacity under the existing authorization to purchase 2,680,668 shares. Source: Seeking Alpha
Selling, General, And Administrative Costs Continue To Decrease, Which May Lead To FCF Margin Growth
Even though quarterly net revenue declined, management also reported a significant decrease in the selling, general, and administrative costs as compared to the same period in 2022. The changes were due to a decreased provision for incentive compensation and lower stock-based compensation expense.
Selling, general and administrative costs decreased $6,128,000 in the 2023 thirty-nine-week period compared to the 2022 thirty-nine-week period. The decrease in selling, general and administrative costs compared to prior year was primarily attributable to a decreased provision for incentive compensation, decreased stock-based compensation expense and a decreased provision for customer bad debt. Source: 10-Q
Given historic changes in SG&A/net sales in the past, I think that we may see further decline in costs in the coming years. In my view, economies of scale, technological innovations, and more agreements with transportation companies will most likely push SG&A down in the coming years. As a result, I believe that we can expect further FCF margin growth.
New Digital Tools Implemented For The Company's Agents Could Bring Further Efficiency And FCF Margin Growth
The company has invested significantly in developing and launching various applications and platforms to meet the needs of its clients, independent agents, and capacity providers. Management believes that leadership in technological development is an ongoing part of providing high-quality service and improving operational and administrative efficiency.
Landstar depends on the proper functioning of its information technology systems, and uses third-party data centers in the U.S. for its operations. The company's strategy focuses on continuing to develop digital solutions to empower participants in its network to succeed in the technology-driven transportation logistics market.
In the last quarterly report, there was an increase in the D&A as a result of new and updated digital tools. I believe this may have a positive effect in the future FCF margins.
The increase in depreciation and amortization expense was primarily due to increased depreciation on new and updated digital tools deployed for use by the Company's network of agents, capacity providers and employees, partially offset by decreased trailing equipment depreciation. Source: 10-Q
Landstar Is An Asset-light Provider Of Transportation, Which May Imply Higher FCF Margin And Better EV/FCF Multiples Than Peers
In the last quarterly report, Landstar reported a ROE of close to 32% and ROA of 16%. The fact that management does not need a lot of equipment and assets to run its operations may explain the profitability of the company. Third party capacity providers offer solutions to Landstar, which lower its capital requirements.
In addition, a significant portion of the trailing equipment available to the Company is provided by third party capacity providers, thereby reducing the Company's capital requirements. Source: 10-Q
The increase in ROA did not happen only recently. For the last twenty years. Landstar has delivered long term ROA growth. I usually do not look at the past to foresee the future. However, we could say that the business model appears to be working pretty well for shareholders.
My Income Statement Expectations
My expectations for future income include net sales growth, net income growth, and a profit margin close to 5%-6%. My figures are in line with previous financial figures and the expectations of other market participants, so I do not think readers will be surprised by my numbers and conclusions.
I expect 2032 revenue of $22.685 billion, 2032 revenue growth of approximately 7%, and investment income of about $2 million. Besides, with purchased transportation of about $17.821 billion, commissions to agents worth $1.935 billion, and gains on asset sales/dispositions of close to $121 million, I also included 2032 insurance and claims close to $318 million.
Moreover, assuming selling, general, and administrative expenses close to $444 million and 2032 depreciation and amortization of $118 million, total costs and expenses would be about $20.759 billion. Finally, with interest and debt expense of $3 million and 2032 net income of $1.361 billion, net income / net sales would be close to 6%.
Cash Flow Expectations Based On Previous Assumptions
My cash flow statements include net income growth with decreasing accounts payable, increases in stock-based compensation, and increases in D&A. I used previous figures and my assumptions to design future cash flows.
In particular, I included 2032 net income of $1.361 billion, changes in depreciation and amortization of $118 million, changes in accounts receivable of $34 million, changes in deferred income taxes of about $-35 million, and changes in stock-based compensation of $19 million.
Additionally, with decreases in trade and other accounts receivable of close to $935 million, decreases in other assets of -$29 million, and increase in accounts payable of -$907 million, I obtained net cash provided by operating activities of close to $867 million and 2032 FCF of $856 million.
Risks
Landstar faces several risks in its business, including the possibility of increased frequency or severity of accidents and claims, dependence on independent commission agents, and third-party capacity providers. Additionally, disruptions to computer systems and cyber-attacks can cause operational and security problems.
Declining demand for transportation services and competition in the industry are also risk factors. In this regard, I am also a bit concerned about the recent decrease in the revenue per load reported in the 39 weeks ended September 30, 2023. We may see lower net sales growth in the coming quarters.
Independent contractors may pose legal and regulatory challenges, and changes in regulations and legislation may affect Landstar's operation. Furthermore, possible changes in tax policy may have a negative impact on the company's profitability.
Competitors
The transportation and logistics services industry is highly competitive and fragmented, with numerous players competing for transported cargo. Landstar's competitors include truckload carriers, digital freight brokers, intermodal transportation and logistics service providers as well as railroads and other light asset transportation and logistics service providers.
Competition in this industry is based on service, efficiency, and freight rates, and is influenced by economic factors such as freight demand and the amount of available transportation capacity. Landstar benefits from its size, service offering, and network of geographically dispersed independent agents, providing it a significant competitive advantage.
My Opinion
I am not concerned about the lower quarterly sales than expected because Landstar appears to be a company with a solid business strategy and a profitable business model. Its focus on technology development and creating digital solutions for participants in its network is a smart strategy to compete in a highly competitive and fragmented industry. Recent increases in stock repurchases also reflect another great reason to review Landstar. Recent increases in the ROA, ROE, and dividend growth could bring new demand for the stock. There are risks associated with reliance on independent commission agents and third-party capacity providers, however the stock does look a bit undervalued right now.
For further details see:
Landstar: Stock Repurchase Increases, Better EPS Than Expected, And Cheap