2023-03-28 23:47:11 ET
Summary
- Old Dominion Freight Line, Inc. maintained a solid performance amidst market headwinds.
- It has a sound financial positioning, which shows its sustainability.
- Near-term market prospects are still bleak, but the company can withstand it.
- Its dividend payments remain continuous, but yields are unattractive.
- The stock price keeps increasing and appears too expensive.
As inflation and interest rates remain elevated, the trucking and logistics industry sees moderating freight demand. Although inflation has relaxed, the purchasing power may take more time to adjust. Indeed, demand and cost pressures are evident and may disrupt operational stability in most companies. But Old Dominion Freight Line, Inc. (ODFL) is an exception. It maintains an impeccable performance with its well-balanced growth and margins. It also keeps its solid market positioning as it outperforms many of its peers.
Moreover, its impeccable financial positioning is visible in its high cash reserves and stable borrowings. It demonstrates its adequate capacity to sustain the operations and withstand more potential headwinds. As such, this capital-intensive company can flourish in a high-interest environment. However, ODFL stock price increase appears excessive for its fundamentals. It seems too high to reflect the intrinsic value of the company.
Company Performance
Trucking and logistics, particularly light truckloads (LTLs), are a cyclical market. It is especially challenging these days as economic volatility remains intense. As of 4Q 2022, inflation has already relaxed, but its near-term impact persists. The softening freight demand and cost pressures are evident. Despite this, Old Dominion Freight Line, Inc. remains successful in cushioning its blows.
Its operating revenue amounted to $6.26 billion , a 19% year-over-year increase. It is also 52% higher than pre-pandemic levels. As such, we can see its swift rebound from its slight downturn in 2020. Despite macroeconomic headwinds, revenue growth remained solid. Thanks to its efforts to stick with its long-term strategic plan. Its strategic pricing allowed it to make up for the impact of softening freight demand due to inflation and the clearing of supply chain bottlenecks. So, the increase in its LTL revenue per hundredweight more than offset the lower LTL tons. Even better, fuel surcharges helped it generate more revenues for its shipments and stabilize returns. It is more practical for the company as fuel prices were elevated in 2022. Also, its capitalization on continued expansion paid off. From 253 centers in the US and Puerto Rico, it now has 255 centers. The increase may be small, but it was already substantial for an established company like ODFL. It increased its domestic and regional market presence to cater to more customers. It may have more advantages in the long run as restrictions in the US and neighboring countries continue to ease. Processing and delivering goods and services may become more cost-efficient. It may increase its operating capacity and stabilize costs and expenses.
Operating Revenue (MarketWatch)
Meanwhile, its quarterly revenues highlighted the impact of inflation. We can see the continued decrease from $1.67 billion in 2Q to $1.5 billion in 4Q. In fact, the market already saw moderating freight demand in 3Q , which intensified in 4Q. The clearing of supply chain bottlenecks was also a primary reason for the lower demand. Thankfully, its pricing and fuel surcharge strategy helped stabilize the operating revenue. It was still 5.6% higher than in 4Q 2021.
Operating Revenue (MarketWatch)
Concerning its peers, Old Dominion remains a force to reckon with. It holds a market share of 7.7% versus 6.8% in 2021. Even better, its revenue growth is way higher than the peer average of 1.8%. Indeed, ODFL outperformed many of its peers, such as Knight-Swift ( KNX ) and Yellow ( YELL ). It has one of the most stable core operations in the industry.
Meanwhile, costs and expenses increased as well. The rising prices raised them, particularly labor, fuel, and equipment expenses. But efficiency helped keep costs and expenses reasonable for its capacity. Also, its pricing strategy partially offsets them. The operating margin was 32% versus 24% in 2021. On a quarterly basis, we can see a slight margin contraction. It was still stable amidst inflationary headwinds. This year, ODFL must anticipate challenges as inflation stays elevated. It may take more time for consumer purchasing power to adjust to it. In its most recent report, its revenue per day last month had a 2.9% year-over-year decrease due to lower LTL shipments. But I expect the company to stay afloat with its pricing and fuel-surcharging strategy. Its quarter-to-date revenue per hundredweight rose by 12% from the same period in 2021. Its near-term performance may see headwinds. But in the second half or in 2024, the company may cope with them and experience slight improvements. We will discuss more of it in the next part. The inflation and average fuel price trend may have a substantial impact on its operating revenue and margins.
Operating Margin (MarketWatch)
Operating Margin (MarketWatch)
How Old Dominion Freight Line, Inc. May Remain A Solid Company
Macroeconomic headwinds are still intense as volatility persists. The softening freight demand also leads to a bleak near-term outlook. Even so, ODFL can withstand these disruptions due to various reasons. First, inflation continues to relax at 6%, over 30% lower than the 2022 peak. Although it may take some time for customers to adjust, the consistent decrease can help stabilize margins. If the downtrend continues, freight demand may bounce back. It is possible since The Fed maintained its tight monetary policy with another 25 bps interest rate increment. Even better, energy commodity prices are lower today. Average gasoline prices are now $3.535 per gallon compared to the 2022 peak of $5.032 per gallon. With the current trend, prices may stabilize and eventually return to pre-pandemic levels.
What makes ODFL a solid company is its impeccable financial positioning. Its stellar Balance Sheet shows it can cover its operating capacity and even expand. Cash reserves drastically decreased in only a year. Despite this, it is still more than enough to cover borrowings, leading to a negative Net Debt/EBITDA Ratio. This attribute is vital for a capital-intensive company like ODFL. It is suitable in a high-inflation environment, making it a liquid company. The cash flow from operations can confirm it since it can cover CapEx. Hence, the company can cover its capacity, withstand more headwinds, and sustain its capital returns.
BS Cash And Equivalents And BS Borrowings (MarketWatch)
Stock Price Assessment
The stock price of Old Dominion Freight Line, Inc. has been in an uptrend since it began trading. It had corrections last year but has already rebounded. At $333.83, it is already 6% higher than last year’s value. However, the stock price appears too expensive for its intrinsic value. We can confirm it with its PB Ratio, given the current BVPS of 33.14 and PB Ratio of 9.58. The PB Ratio is way higher than the average of $6.84x. If we use the current BVPS and average PB Ratio, the target price will be $226.54, showing overvaluation.
Meanwhile, the company remains committed to its dividend payments. However, yields are only 0.48%, way lower than the S&P 500 and NASDAQ average of 1.64% and 1.52%. The only consolation is its adequate capacity, given the Dividend Payout Ratio of 12%. To assess the stock price better, we will use the DCF Model.
- FCFF $1,090,000,000
- Cash $236,000,000
- Borrowings $198,000,000
- Perpetual Growth Rate 4.8%
- WACC 9.2%
- Common Shares Outstanding 110,220,000
- Stock Price $333.83
- Derived Value $225.07
The derived value confirms the potential overvaluation of the stock price. There may be a 33% downside in the next 12-18 months. So, investors must beware of the potential decrease before buying shares.
Bottomline
Old Dominion Freight Line, Inc. is a huge and solid LTL company. It maintains a robust performance and impeccable financial positioning amidst macroeconomic headwinds. It also has adequate means to cover its capacity and capital returns. However, the stock price is overvalued, matched with measly dividend yields. The recommendation on Old Dominion Freight Line, Inc. continues to be a hold.
For further details see:
Old Dominion: A Solid And Well-Positioned But Overpriced LTL Contender