Picking the Best Name in the Less-Than-Truckload Category

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Less-than-truckload (LTL) is a commonly used terminology in the world of trucks. LTL is different from truckload, as the former means that the goods being transported will not take the entire truck floor whereas the latter takes the full. Therefore, with LTL, you only pay for the space you occupy and not for the whole truck. 

Truckers with large LTL exposure have been flying since the start of the year, thanks to recessionary times during which LTL is used more often than truckload (as people have got less to transport across the regions).

This company has more than doubled its market cap

Arkansas Best’s (NASDAQ: ABFS) core LTL business has significant operating leverage to both price and volumes. Also, the company's investment in higher growth/return asset-light services should resonate well with investors. Arkansas Best acquired Panther for $180 million in 2012. Panther is a non-asset carrier player. Hence, through this acquisition, Arkansas has got exposure into truck brokerage as well.

For a long time, the company faced problems with its labor given that the latter wanted relaxations in terms of work flexibility. However, recently Arkansas Best has reached a deal with the Teamsters union, which has sent bullish signals to the market. Whereas, the agreement has come with an increase in wages for members of the union (which are mostly drivers), it will still be beneficial for the company. The company will be able to solve its network density issues.

However, sell-side analysts believe that despite a new contract, Arkansas’ union workforce puts it at a significant competitive disadvantage in the LTL industry, and will likely remain a structural overhang on profitability for years to come. Therefore, a neutral rating is given on this company.

Another healthy LTL investment

With its pricing still below prior peaks, Con-way (NYSE: CNW) has one of the larger opportunities for price growth among the LTLs. Margin expansion on Con-way’s Freight is also supported by continued progress on optimization initiatives. However, what remains unknown is at what pace Con-way will achieve pricing improvements. Morgan Stanley remains more skeptical on the pace of improvement than bulls.

The company has got a greater exposure to higher growing regional LTL markets. Company-wide adoption of LEAN will benefit both LTL and truckload segments. LEAN, is described by the company in the following way:

Lean is central to our strategy at Con-way Freight as we engage all employees in continuous improvement to provide the highest level of safe, responsive, and reliable service to our customers.

However, it should not be overlooked that the company is not a pure-play on the LTL mode of transportation. It also has a full truckload segment and hence is exposed to sluggish growth in the truckload segment in the US. Furthermore, Con-way’s higher financial leverage versus its peers may pose incremental downside risk if macro uncertainty increases.

The best LTL player out there

Old Dominion Freight Line (NASDAQ: ODFL)) has remained a favorite in this space for quite some time. Superior execution versus peers will continue to drive market share gains as well as profitability. Old Dominion’s cost advantage, strong service, and use of 3PLs is likely to drive volume growth well in excess of the overall LTL industry, and will support significant long-term earnings growth and out-performance. 

Old Dominion has recently started 3PL, or a third-party logistics unit, to respond to customer demands for increasingly complex supply-chain solutions. The unit, Vault Logistics, will operate as an independent division within Old Dominion and also as a neutral third-party service provider, meaning it can use other carriers besides Old Dominion if customer needs warrant.

The company has also earned a place in the must-buy list of Goldman Sachs. The only potential headwind is that after achieving such a heavy margin expansion, there remains less room for more expansion.

Final word

LTLs have seen their revenue surging higher given weakness of demand for TL freights. As far as the companies are concerned, Old Dominion remains the best pick in this space given its new initiatives and superior execution of business. Arkansas Best has some headwinds in the form of an increase in expenditures as a result of its recently signed pact with the Teamsters union. Conway is exposed to the truckload segment, which means that its poor performance will impact growth in the LTL business. 

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Zain Abbas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

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