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