Previous Dominion: A Trucking Titan, However Their Inventory Appears Overvalued (NASDAQ:ODFL)

Funding Thesis

Previous Dominion Freight Line (NASDAQ:ODFL) is a key participant within the U.S. LTL trucking trade. Their vertically built-in and extremely aggressive community of service centres, terminals and tractor trailers has allowed the agency to outpace their rivals and develop into a splendidly worthwhile enterprise within the course of.

Nevertheless, the present valuation suggests a 34% overvaluation in shares even in my base-case intrinsic worth calculation, which leaves little room for value-oriented buyers to develop into engaged with the corporate’s inventory.

Because of this, and regardless of my admiration for Previous Dominion’s economics and returns, I have to fee the trucking titan a Maintain nowadays.

Enterprise Overview

Previous Dominion is the most important less-than-truckload (“LTL”) freight service in the US. The agency has constructed their repute round old style values with a deal with being reliable each by way of timeliness and delivery high quality whereas additionally providing nice worth to their shoppers.

Much less-than-truckload delivery itself as an trade refers primarily to the transportation of particular person parcels and freight which might in any other case be too small both in measurement or quantity to be carried by full-truckload carriers (FTLs).

In follow, which means that Previous Dominion will fill their vehicles with freight from a number of shippers without delay, as a substitute of being contracted to 1 consumer at a time. Whereas this does have a tendency to extend the complexity of LTL operations when in comparison with FTLs, there is a chance for Previous Dominion to cost comparatively extra for every unit of freight transported.

The corporate themselves have been in operation for over 90 years with a steady deal with the enlargement of their community, permitting the agency to develop into what’s the single largest LTL service. Previous Dominion has additionally continued to answer the quickly altering calls for by clients relating to freight transportation, with the agency’s next-day-deliver providers changing into more and more standard amongst shoppers.

The subject of apparatus is commonly ignored when discussing LTL freightliners, however is one thing I discover helps buyers to essentially perceive the underlying enterprise. Previous Dominion primarily operates a mixture of day cab semi-trucks used for long-haul transport in addition to a big fleet of “pickup and supply” or P&D vehicles, that are normally non-articulating box-trucks used for ultimate vacation spot transport.

In my view, the important thing relating to analysing and assessing freight trucking companies is to know that the totally different sectors throughout the trade (be in LTL or FTL) refers primarily to the way during which house aboard the transport is offered moderately than the kind of gear being utilised.

Financial Moat – In-Depth Evaluation

After cautious evaluation of Previous Dominion’s enterprise, I confidently award the agency with a slender financial moat regardless of the large ranges of competitors and comparatively low limitations to entry current within the trade.

Previous Dominion continues to rule the roost by way of community scale and revenues, however stays in fierce competitors with FedEx (FDX), Saia (SAIA) and XPO (XPO) relating to attracting shoppers to their options.

Whereas most freight transportation options resembling rail or air have vital limitations to entry each within the type of regulatory governance and big capital prices, the LTL trade is in the end comparatively straightforward for a brand new entrant to determine themselves in.

Because of this, LTL firms face huge competitors each from the prevailing and established gamers in addition to newer entrants resembling Amazon Freight, a subsidiary of e-retail giants Amazon.com (AMZN).

The consequence of such a aggressive market for the businesses concerned manifests itself within the type of low lane densities for some operators.

Lane density is a trucking metric used to gauge how full a given truck is when in operation. Business analysts at the moment estimate that roughly 40% of all vehicles hauling within the U.S. and doing so with lower than half-full hundreds and even while utterly empty.

Previous Dominion’s actual benefit over their rivals seems to be their skill to draw clients to their service by providing an outstanding worth proposition that mixes pace of transport with dependability.

Whereas many rivals resembling Saia and now defunct, Yellow Trucking struggled considerably throughout recessions to remain worthwhile, Previous Dominion’s extra cost-conscious administration helped be sure that enough capital remained current even amidst financial downturns to proceed investing in haulage capability, significantly doorways at service centres.

Because of this, Previous Dominion now has an unrivalled community of what are known as service centres, terminals and breakbulks in addition to a large fleet of vehicles and trailers. These services are what have a tendency to limit working capability at LTL operators throughout boom-times, a difficulty Previous Dominion has averted by way of long-term capability planning and vertical integration.

I consider that it’s this elementary capital benefit that has allowed Previous Dominion to supply a extra enticing product to shoppers all of the whereas being extra environment friendly with their capital, thus rising their profitability and returns accordingly.

The agency has additionally been significantly good at adapting to modifications in consumer calls for with revolutionary choices resembling their single- or two-day supply service or security-focused safe freight service.

General, I consider the administration crew’s deal with long-term capability planning has enabled the agency to develop a extra complete and aggressive trucking community which in the end permits the agency to be each extra environment friendly and productive than rivals, thus warranting a slender financial moat ranking.

Fiscal Evaluation

Previous Dominion Freight Line is certainly one of my favorite examples of a extremely worthwhile and basically great enterprise.

5-year common ROA, ROE and ROIC for the agency are at the moment 21.85x, 29.03x and 28.18x respectively, which is indicative of their skill to fill vehicles and function at excessive lane density.

To be able to perceive their very spectacular five-year ROIC of 28.18x, we should examine it in opposition to their present WACC, which is 11.3%.

Because of this Previous Dominion is producing simply shy of 17% internet returns on each greenback of capital they make investments, which, fairly frankly, is an astonishing determine, particularly contemplating that the agency solely has a slender financial moat supporting their enterprise.

In the end, I consider that these excellent returns boil down to 2 key elements: environment friendly capital employment practices and excessive lane densities in operations because of an awesome community of service centres.

By specializing in environment friendly utilisation of present capital moderately than extreme development or the alternative of nonetheless serviceable gear, Previous Dominion is ready to primarily produce extra internet revenue per unit of capital expended.

Equally, the agency’s resolute mission to maximise revenues per unit of cargo by way of excellent native community buildings would additionally logically yield higher returns from their enterprise. The wear and tear and tear on terminals and vehicles is extra akin to a set price associated to miles or time operated, moderately than a variable one associated to the volumes of parcels onboard.

Previous Dominion reported Q2 outcomes on July 24 with the important thing takeaway being stable YoY income development together with some great working margin enhancements.

Prime-line income development of 6.1% YoY noticed Previous Dominion generate a staggering $1.50 billion in Q2, FY24. The primary drivers of such stable income development have been an general improve in LTL revenues per hundredweight, together with round a 2% improve in LTL transport volumes per day (measured in metric tons).

The time period “revenues per hundredweight” refers to the truth that most LTL freight is priced in keeping with the cargo’s weight per hundred kilos or 100 kilos. Previous Dominion’s 4.4% improve in LTL revenues “per hundredweight” implies that the agency generated 4.4% extra income per hundredweight (consider it as “per unit of cargo”).

Through the earnings name, CFO Adam Satterfield famous that attributable to each astute price management by administration together with profitable outcomes from their cost-based pricing technique, working revenue elevated a fairly large 7.7% YoY.

Once I noticed these figures, I used to be (and proceed to be) extremely impressed provided that the enterprise is a mature and long-standing one moderately than a start-up or youthful operation.

Previous Dominion’s skill to cut back working provides and bills, communications prices and licensing prices throughout continued instances of above-average price inflation illustrates simply how dedicated administration is to operating an economically environment friendly enterprise; a follow I fee extremely.

The outpacing of working revenue development to income development noticed Previous Dominion Freight Line’s working ratio cut back from 72.3% to 71.9% which is completely illustrates the 40bp enchancment in working margin on the agency.

Web revenue adopted the stable development in revenues and working revenue rising 10.2% YoY to $322 million, while EPS per diluted share grew 11.3% YoY.

Such great working leads to Q2 are supported by Looking for Alpha’s Quant, which at the moment charges ODFL as having an “A” profitability grade.

After inspecting Previous Dominion’s steadiness sheets, I’m pleased to report that the agency continues to exhibit some great capital allocation methods and sports activities a strong fiscal profile.

Quick-term liquidity is great with complete present property totalling simply $807 million whereas complete present liabilities quantity to only $553 million. This leaves the agency with wholesome fast and present ratios of 1.30x and 1.50x accordingly.

Previous Dominion continues to additional enhance their already stable long-term liquidity state of affairs by repaying long-term debentures as they come up, with the agency solely holding $40 million on the finish of Q2.

The second quarter additionally noticed Previous Dominion proceed their share repurchase and dividend program, with the agency buying shares price $637 million in Q2 whereas additionally paying out $112 million in dividends.

Moreover, the corporate continues to deal with long-term enlargement even regardless of the bearish macro atmosphere by funding service centre and fleet expansions throughout their community. I consider it’s precisely this long-term focus that has allowed and can proceed to permit Previous Dominion to outperform their rivals and generate actual long-term returns for shareholders.

Valuation

Looking for Alpha’s quant grades ODFL’s present valuation as an “F” which sadly, I’m largely inclined to agree with.

The present P/E GAAP TTM of 34.26x could be very elevated for a corporation rising top-line revenues at simply 5-7% each year whereas additionally being over 4% above their 5Y imply.

An analogous state of affairs is current when inspecting their P/S TTM of seven.30x or their P/CF TTM of 25.57x. Whereas the underlying profitability and stability on the agency is sort of exemplary, a P/S a number of of over 7 instances suggests most of those advantages are already priced-in and raises the query of what occurs ought to gross sales or cashflows cut back (say attributable to a recession).

I additionally discovered it prudent to analyse the Looking for Alpha 5Y Superior Chart for ODFL inventory and plot it in opposition to the ever-popular S&P 500 monitoring SPY (SPY) ETF index.

The large outperformance of the index by ODFL inventory for the reason that introduction of COVID illustrates how effectively Previous Dominion was capable of harness the highly effective financial bounce-back of the U.S. financial system and sudden huge demand for bundle transport and haulage.

Whereas extra flat line outcomes could also be in-store given the current and chronic surge, I do consider Previous Dominion’s long-term technique focus means the agency positions themselves to adapt shortly to altering market landscapes.

I additionally used my Intrinsic Worth System to derive a quantitatively based mostly intrinsic valuation determine for ODFL inventory.

By inputting the present share worth of $200.17, an analyst consensus estimate for 2024 EPS of $5.70, a practical “r” worth of 0.11 (11%) and the present Moody’s Seasoned AAA Company Bond Yield ratio of 5.12x, I calculated a base-case IV of $149.40 for ODFL inventory.

In comparison with the present share worth, my base-vase IV suggests an enormous 34% overvaluation at current time.

Thereafter, I modelled for the impacts a recessionary market atmosphere would have on top-line revenues by decreasing the r worth to five%, an affordable estimate for my part given historic information from 2009-2010.

Because of this, the present IV given this bear-case state of affairs can be simply $90.6 implying a 120% overvaluation at current time.

Contemplating these IV calculations, I consider that the short-term (1-12 month) outlook for ODFL inventory could also be fairly convoluted. Premium inventory valuations have a tendency to extend volatility for shares, with some buyers reacting extra pronounced to adverse information or market information.

I due to this fact refuse to make any short-term predications on ODFL inventory worth.

Nevertheless, within the long-term (1-10 years) I consider the agency is effectively positioned to proceed producing sustained top-line development all of the whereas persevering with to enhance their working economics by way of scale benefits and effectivity enhancements.

Previous Dominion Threat Profile

Previous Dominion Freight Line faces threats from aggressive pressures and market dynamics.

Given the comparatively low limitations to entry for brand spanking new gamers or present rivals relating to enlargement within the LTL trucking trade, Previous Dominion will proceed to face fierce strain from their rivals.

Whereas the agency seems to have the higher hand on steadfast rivals resembling Saia, new rivals resembling Amazon Freight have emerged and threaten to eat-away at Previous Dominion’s market share. Certainly, the menace Amazon Freight creates is sort of vital provided that in 2021 Amazon was Previous Dominion’s largest buyer by volumes and revenues.

Contemplating that Amazon just isn’t an LTL specialist, it might be incorrect to imagine the agency is out to overcome your entire trade. Nonetheless, ought to Amazon proceed to maneuver extra LTL trucking calls for in-house, Previous Dominion might expertise a tangible drop in income development.

Moreover, Amazon Freight has begun providing LTL providers to third-parties as their service begins to have some free-capacity which in the end means that the service is positioning themselves as an actual competitor to Previous Dominion and Saia.

Recessionary market environments even have the chance to considerably cut back earnings at Previous Dominion as decreased enterprise exercise and shopper spending would undoubtedly cut back demand for LTL providers.

This might see Previous Dominion produce some lacklustre earnings information for a few years and thus place downward strain on shares. Nonetheless, I don’t consider that the agency would face any liquidity or long-term penalties of such an financial downturn, as their strong economics and sound enterprise mannequin allows resilience and flexibility on the agency.

Abstract

Following my two-day examination of the trucking trade and Previous Dominion particularly, I have to confess that I’m completely impressed by the administration and profitability of this freight line.

Whereas many industrial companies resembling trucking might initially seem homogenous in product and repair, the truth is that enough variation in buyer calls for exists to permit extra aggressive firms to tangibly outperform their rivals whereas producing some excellent returns within the course of.

In my view, Previous Dominion Freight Line is precisely this firm.

The corporate has managed to construct a slender financial moat because of their deal with long-term development, vertical integration and a aggressive service for patrons. In flip, these elements have enabled the agency to generate actual returns from their enterprise all of the whereas rewarding shareholders handsomely for his or her inventory holdings.

Nonetheless, I consider that the valuation of ODFL inventory is really extreme, thus creating further volatility and uncertainty round short-term outcomes.

Whereas the long-term outlook continues to be sturdy, I can not advocate the constructing of a place in a inventory which may be buying and selling at a 34% overvaluation given a base-case state of affairs.

Subsequently, I fee ODFL a Maintain nowadays and eagerly await a extra value-oriented inventory worth earlier than I buy shares for myself or my shoppers.