On The Road Again
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The trucking industry continues to roll, delivering the nation’s products from manufacturers to your local neighborhood merchant. According to the American Trucking Association, an industry trade group, trucking companies transport roughly 70% of the country’s freight and they continue to be a leading barometer of economic growth. While the financial crisis of 2008 led to reduced traffic and some bankruptcies, smart operators have spent the last few years reducing their leverage, expanding their operations to create national networks, and providing increased value for customers. One company that has been delivering for shareholders is Old Dominion Freight Line (NASDAQ: ODFL).
Building the Network
Founded in 1934 by the Congdon family, Old Dominion has grown through selective acquisitions and adding service centers around the country. The company was a beneficiary of the Motor Carrier Act, passed by Congress in 1980, that deregulated the industry by eliminating restrictions on business operations and allowing for price flexibility. Old Dominion competes in the less-than-truckload (LTL) segment, where trucks carry multiple shipments from multiple carriers on a single truck and route deliveries through service centers. The LTL business requires a strong network of centers to efficiently handle the deliveries and the company currently has 219 centers located throughout the U.S. Its strong cash flows over the past few years have provided the necessary capital to continue building centers and adding to their fleet of tractors and trailers.
Despite the financial crisis, the company has continued to grow with revenues, up 34.3% over the past four fiscal years. For FY2011, Old Dominion reported revenues and net income of $1.9 billion and $139.5 million, increases of 27.1% and 84.4%, respectively, over the prior year period. The company operated at the most efficient level of the past five years and continued to gain market share, with total shipments rising 14.7% to 7.3 million for the year. The pricing for its shipments remained strong, with revenue per shipment rising to $259.50 in FY2011 from $234.09 in the prior year period. Despite high fuel prices, the trucking industry has maintained operating margins through its ability to pass these cost increases on to its customers through fuel surcharges. In 2012, Old Dominion has continued to grow, although more slowly than last year’s fast pace. In the third quarter of 2012, the company reported revenues and net income of $544.5 million and $51.0 million, increases of 10.1% and 32.1%, respectively, versus the prior year period. Old Dominion’s operating margin improved for the 11th consecutive quarter and its total shipments increased 5.1% compared to last year’s results. While the growth in fuel surcharges has moderated due to fairly stable U.S. diesel prices, the company’s pricing of shipments continues to rise and it was able to institute a 4.9% increase in rates for its non-contractual business.
Looking into the Crystal Ball
Old Dominion’s future prospects look bright as its customers look for trucking companies capable of delivering comprehensive services, rather than just the cheapest price. While the Department of Transportation’s regulation of truck drivers’ hours of service is likely to increase the industry’s costs, Old Dominion’s on-time track record and network of service centers should provide a competitive advantage. The company continues to invest in equipment, with $309.7 million of capital purchases in 2012, and it sees a complementary business opportunity in the home moving business, an area that is has moved into this year. It is one for the portfolio.
Alternatively, investors might want to consider well-run, global suppliers to the trucking industry, such as Cummins (NYSE: CMI) and Fleetcor Technologies (NYSE: FLT). Cummins is a leading manufacturer of diesel engines for a variety of trucks and commercial vehicles, operating in 190 countries. Over the four fiscal years ended December 2011, the company grew its sales and net income by 38.3% and 150.1%, respectively, through expansion of its markets and new product innovation. Through the first nine months of 2012, Cummins financial results were in line with the previous year period, although the latest quarterly results showed declines in engine sales due to economic weakness in some of its markets. However, the company is currently valued at an 11 P/E multiple and will benefit from increased engine sales over the long run.
Meanwhile, Fleetcor Technologies is a global provider of payment card services to commercial fleets. The company grew substantially over the four fiscal years ended December 2011, as sales increased 96.7% due to international expansion and greater use of payment cards by customers to manage their fuel costs. Through the first nine months of 2012, it has reported excellent results with sales and net income of $504.9 million and $156.1 million, increases of 33.1% and 42.4%, respectively, over the prior year period. Fleetcor benefited from a 49% increase in total transactions, which was partially offset by lower margins in new international markets. The company is currently valued at a 19 P/E multiple, below its recent growth rate, and it will benefit from continued industry consolidation over the long run. Both companies should remain on long term investors' watchlist.
rghanley owns shares of Old Dominion Freight Line and Fleetcor Technologies. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
