Whether it was a slight miss relative to consensus or post-earnings commentary from UPS (NYSE:UPS) management, Old Dominion (Nasdaq:ODFL) sold off on April 26, 2012 despite a solid report. This company remains one of the best stories in less-than-truckload shipping and a solid growth story. While the valuation is still a little high, investors ought to give this one a look.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

A Good Quarter Despite Rising Expectations
If Old Dominion disappointed investors, it could only be because a long string of solid results has led them to expect a lot more. Revenue rose more than 17% this quarter, with tonnage growth of nearly 11%. That stands out from the likes of YRC Worldwide (Nasdaq:YRCW), Con-way (NYSE:CNW), UPS (NYSE:UPS), and FedEx (NYSE:FDX) in the LTL sector.

Pricing was also OK, as the company saw better than 3% growth (net of fuel). Shipment volume increased more than 9%, while revenue per shipment rose more than 6%.

Although Old Dominion has been aggressively growing its business, it is still managing to post some very strong operating results relative to other trucking companies. The operating ratio (basically the inverse of operating margin) improved 110bp this quarter to 89.1%.

SEE: Understanding The Income Statement

LTL Still OK
There's a lot of talk out there about the growth of rail shipment and the relative efficiency of rail versus on-the-road trucking. It's all true ... to a point. Yes, rail traffic is more efficient and rail has been taking share away from some kinds of trucking.

But a little perspective is in order. According to the Journal Of Commerce, the LTL trucking industry grossed just over $30 billion in revenue for 2011. By way of comparison, Union Pacific (NYSE:UNP) reported $19.6 billion in revenue, while CSX (NYSE:CSX) reported about $11.7 billion - so two rails outdid the entire LTL industry.

It's also worth remembering that there are things rail just can't do. Rail is a fine way of getting bulk cargo across the country, but it's not like the railroads are capable of delivering to the loading dock of the local Walmart (NYSE:WMT).

Plenty More to Go
I expect Old Dominion to continue to gain share in the LTL industry, and there's plenty of room to grow. While Old Dominion is out-growing larger companies like YRC and Con-Way, it's still quite a bit smaller. What's more, while LTL trucking is a fairly concentrated market (90% of the revenue comes from 25 companies), there's still ample opportunity for acquisition or competitive takeaway.

There will be a balancing act with this growth, though. Management needs to be careful not to overreach or stretch its balance sheet too far in the pursuit of growth.

SEE: Analyzing An Acquisition Announcement

The Bottom Line
Discounted cash flow approaches don't often work especially well in the transport industry, as the companies tend to make large capital expenditure (capex) investments with distant expected returns. Said differently, investors have to model out to 10 or 20 years for most transports to "work" on a cash flow basis, and nobody has any idea what the year 2030 is going to look like.

Consequently, an enterprise multiple is a relatively common valuation approach. I expect EBITDA to grow roughly 17 to 18% in 2012, and I'm willing to give Old Dominion an eight times multiple to that EBITDA. That results in a price target in the low $50s - not a major premium to today's price, but perhaps enough to entice investors who want an organic growth story in their portfolio outside of tech.

SEE: 5 Must-Have Metrics For Value Investors

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

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

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. 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.
  9. 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.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  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," ...
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

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!