A Truck Stock on the Growth Road
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Freight companies in the United States are now concentrating on utilizing energy efficient sources, which not only reduce their carbon footprint but also lower their annual energy expenses. Various initiatives are being taken in this regard, such as motion sensors, solar panels, biodegradable packaging materials, speed reduction by drivers, etc. The stock I picked up today, Old Dominion Freight Line (NASDAQ: ODFL), has made its appearance in the Inbound Logistics’ G75 List for the third time. A part of its continued commitment towards using new energy is the installation of a new rooftop solar panel system for its 160,000 square foot warehouse in Thomasville, North Carolina. It has hired SunEnergy1 to build a system that will meet 90% of the building’s energy consumption, reducing its carbon footprint substantially and also reducing its expenses at the same time. This system is the third of its kind in North Carolina.
Despite the soft economic conditions, Old Dominion reported good quarterly earnings for its 3Q 2012. The revenue for the third quarter increased 10.1% year over year (Y/Y) to $544.5 million. Also, its profit margin jumped 31% Y/Y. When looking at the past figures Old Dominion has done really well in revenue and EBITDA growth. Consequently, the stock of the company is trading currently at $32.77 with a good appreciation of ~24% over the year.
YRC Worldwide (NASDAQ: YRCW) posted operating income of $27.3 million in Q3, nearly doubling its Q2 2012's operating income of $15.6 million. The improving margins have put the company, which had come close to bankruptcy several times in the past, back on track. The company has performed very poorly over the last five years due to sheer mismanagement. Its mergers and acquisitions during 2003 and 2005 led to a very high cost load, which resulted in a large debt load and declining revenues. The company then restructured its team and the board in July 2011. As a result, the effectiveness of the new management brought in positive results in operating income for the first time in the last four years in 2Q 2012. The new team has further plans for cost reduction, streamlining operations, and improved customer service, which will surely reflect in growing financials.
J.B. Hunt (NASDAQ: JBHT) reported its third quarter of 2012 with revenue up 11% from the same period in 2011. The company is exposed to a diverse group of customers spread throughout the continental United States, Canada, and Mexico. The company should benefit from the ramping up of demand from retailers and grocery stores who want dedicated fleet services as it has made earnest efforts in driver hiring. Also, in the last quarter the company’s dedicated-contract services fleet grew 4.8% to 5,153. J.B. Hunt hired Workday Inc.’s cloud-based delivery model to turn its legacy technology into a modern financial management system. The system will enable effective decision making and reduce IT complexity and costs.
Returning to Old Dominion Freight Lines, it is well placed within the market with its expansion strategies and capex spending.
1. Expansion Strategies
In the last ten years, Old Dominion has focused on expanding its activities from its roots in the Southeastern US. The company did well in acquiring market share from weaker trucking firms through its less expensive labor force. As part of an investment plan of $90-120 million for real estate purchases and expansion projects in 2012, it has opened four new service centers in the third quarter: Orange, CA; Pensacola, FL; Duluth, MN; and Parkersburg, WV. Its planned expansion now covers branches, service centers, and routes across the Gulf Coast, Northeast, Midwest, Central Plains and West Coast. It now operates in 48 states with 219 service centers and 28,000 tractors and trailers. Further in line are 40 new service centers to strengthen its operations across major regions.
Old Dominion is continually updating its systems and technology to figure out efficient routes in order to improve the customer experience and network productivity. Old Dominion spends 3x the capex on a certain %-of-revenue compared to its peers, which has helped it gain a competitive advantage. Integrating technology throughout its network gives it a lower cost structure and better visibility in the decision making process to drive efficiency in route planning and lane density.
3. Reducing cargo claims
Old Dominion works on the philosophy of perfect service, which has resulted in on-time delivery and reducing cargo claims over time. It has increased its delivery on time percentage from 93% to 99% in the last 15 years with fast transit times. Also, through innovative materials (such as dunnage, air bags, straps) to load shipments, the company has been able to reduce cargo claims from about 1.6% of revenue in 1997 to roughly just 0.4% in the third quarter of 2012.
Over the last ten years this company has grown exponentially from a mere regional firm to a well-entrenched national company. In the last decade, it has maintained on-time delivery at 99% and improved cargo claims ratio through value services coupled with lower prices, which has helped it gain market share. Its expansions will benefit its customers and provide them uninterrupted service, and also reduce congestion, which will result in improved operations and operating cost reductions. The company has achieved superiority over its peer group through disciplined expenditure in all segments. The more appealing features for the stock is its forward P/E of 14.25 and an impressive EPS of 2.01.
ShwetaDubey has no positions in the stocks mentioned above. 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!