A Stock Pick Buffett Would Approve

Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Buffett has many rules when it comes to investing but three of his most well-known criteria for investments are:  easy-to-understand business, strong management team, and a good value.  Heartland Express (NASDAQ: HTLD) meets this criterion; it is a top performer in its industry with a strong management team focused on employees, customers, and shareholders and its stock is selling close to a decade low.  

Easy-to-Understand

Heartland Express is a short- to – medium haul regional truckload carrier with the average length in haul at about 500 miles for the past decade—with a majority of these routes East of the Rocky Mountains.   Heartland transports goods for numerous industries: retail, food, consumer goods, manufacturing and automotive; targeting customers with multiple, time-sensitive shipments.  By providing high levels of customer service including industry leading on-time performance, Heartland is able to differentiate itself from its low-cost focused peers, because most of Heartlands customers are concerned with  the on-demand, high quality delivery that Heartland can provide. 

Heartland provides high service through hiring experienced drivers and retaining the top drivers in the industry.  The average experience level of a Heartland driver is over seven years and these drivers are paid roughly 25% more than the industry average and incentives for accident free driving.  The rationale for paying drivers more is that retention of the best drivers in the industry will be high and, in turn, provide the best service possible and optimize safety.  Heartland is able to pay drivers more by focusing on minimizing operating expenses in other areas such as high utilization of truckloads and minimizing downtime of tractors. 

This has been a proven strategy with Heartland posting industry best operating and efficiency ratios.  Heartland has had an operating ratio in the low 80s for the past decade while competitors like Marten Transport (NASDAQ: MRTN), Werner Enterprises (NASDAQ: WERN), and JB Hunt (NASDAQ: JBHT) have all been above 90%, which is industry average.  One competitor that has been close in operating efficiency is Knight Transportation (NYSE: KNX) with mid 80s operating ratio, but averages a fixed asset turnover of 1.7 while Heartland boosts a fixed asset turnover of 2.2.

Disciplined Management

Just like how Buffett would like it, Heartland boosts a strong management team led by Michael Gerdin, son of the founder Russell Gerdin. Management has been able to ingrain its culture of minimizing costs and increasing operating efficiency throughout the organization. 

Management has shown discipline throughout the years and has made plenty of strategic decisions that have benefitted shareholders.  Probably the most Buffett-approved has been management’s decision to stick exclusively with its core competency, short- to- medium dry-van shipping, while most of its competitors have been attracted by faster-growing refrigerated services and expansion into long-haul shipping.    By focusing on short – to – medium and not long-haul, Heartland is able to focus on its customer niche of on-demand delivery, avoid major competition from railroads, and keep drivers happy with shorter trips meaning more time at home.

Another Buffett-approved move was when management bought low and sold high on tractors.  During the economic downtown in 2009, management purchased almost an entirely new fleet of tractors while the price was low and waited to sell its old tractors until the price recovered in 2010-2011. This led to Heartland owning one of the youngest fleets in the industry with the average tractor age being 2.4 years.

Management has aligned itself with shareholders with insiders owning 34% of the outstanding shares and has treated them very well.   Management has been consistently returning cash to shareholders through dividends, including a $1 special dividend just last week, and share repurchases.  Over the past five years, management has repurchased roughly 13% of the outstanding shares for an average price of around $13.

 Good Value

As with most cyclical businesses, Heartland’s revenue took a hit during the most recent recession, with both volume and revenue per mile falling.  According to the American Trucking Association, the average trucking revenue and revenue per mile fell 27% and 10% respectively in 2009, but both have gained most, if not all, of that loss back.  However, Heartland’s stock price has not recovered, trading at close to decade lows and around a $1 billion market cap, which again is close to a decade low.  (Note: Recent pullback was due to the stock trading ex-dividend after the $1 special dividend)

Bottom Line

There is a lot about Heartland Express to like: young fleet, experienced drivers, award winning customer service, disciplined management, and one of the best operating ratios in the industry.  This combined with shares trading at decade lows displays why Heartland might be something Buffett would love to get his hands on.

 


XMFNpugs has no positions in the stocks mentioned above. The Motley Fool owns shares of Heartland Express. 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!

blog comments powered by Disqus