Investors may not be feeling all that confident about the health of the U.S. economy, but that's not really showing up in the transport stocks. Rails and truckers have been doing relatively well, and given that their demand is derived from economic activity, that's an encouraging sign. Old Dominion (Nasdaq:ODFL) is a challenging case for investors. On one hand, this is one of the most interesting and dynamic carriers out there, but the valuation takes a little getting used to for prospective investors.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Zigging While Others Zag
Trucking is to some extent a commodity business - at least insofar as everyone offers the same basic service (moving your goods from point A to point B), and there is not a lot of room for unique pricing. But, that should not be taken to mean that trucking companies cannot stand out and make different strategic decisions.

To wit, while unions still have a meaningful presence in trucking, that's not the case for Old Dominion or Con-Way (NYSE:CNW). That arguably gives the company flexibility on wages and hiring that a rival like Arkansas Best (Nasdaq:ABFS) does not enjoy. (For related reading on unions, see 6 Things Putting Unions Under Fire.)

What's more, many truckers are actually trying to consolidate their service areas, generate better profitability and conserve capex dollars. Old Dominion is going the other direction - spending aggressively on service centers, tractors and IT systems. This is giving the company the opportunity to not only capture shares, but lay the groundwork for a more profitable enterprise down the line.

Different Is Proving to Be Better
So far, Old Dominion's philosophy seems to be working out. The company has grown to become the 6th-largest less-than-truckload carrier at a time when many carriers are struggling ((like YRC Worldwide (Nasdaq:YRCWD) or pulling out of the direct trucking business (like J.B. Hunt (Nasdaq:JBHT)).

Old Dominion is posting revenue growth in excess of 20% at a time when the industry is growing more at a single-digit rate, and the company is doing it through a combination of tonnage and price growth. Even better, the company is posting profitable growth. Old Dominion has an enviable operating ratio, despite the fact that it keeps adding service centers and has to swallow the overhead costs of these new facilities.

If there are fundamental issues with Old Dominion, they are likely centered in the free cash flow generation. Although Old Dominion's trailing return on invested capital has not always been great, a lot of that has been a byproduct of lower capital turnover and higher capex and the company has started to leverage that better.

On the cash flow front, the company is clearly spending a lot more than its rivals to build its asset base. In a trucking world where capex is often 4 to 5% of revenue, Old Dominion's is around 14%. Companies like Arkansas Best, FedEx (NYSE:FDX) and UPS (NYSE:UPS) have the advantage of leveraging larger already-built asset bases, and don't have to constantly invest the same level of funds. At the same time, this is future leverage for Old Dominion, as free cash flow could leap up in future years as there are fewer demands for new service centers.

The Bottom Line
Simply put, valuing a stock like Old Dominion is a pain in the neck. A simple P/E-based analysis does not really acknowledge the realities of Old Dominion's cash flow situation, while a discounted cash flow model will almost certainly undervalue the company's future cash flow leverage potential. (For related reading, see Top 3 Pitfalls Of Discounted Cash Flow Analysis.)

In times like these, then, a compromise approach like EV/EBITDA can be helpful and it's not uncommon to use this metric in the transports. To that end, Old Dominion is pretty attractively priced, even allowing for the fact that the stock has run well this year and is near a 52-week high. Although buying into this end-of-year melt-up may not be a great idea, Old Dominion is a great transportation growth story that is worth a serious look by most investors.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!