Freight Brokerage Backdrop Remains Challenged for Landstar, but Execution Solid

Senior Equity Analyst

Matthew Young

Landstar System ranks among the largest third-party logistics providers in the highly fragmented $140 billion-plus domestic asset-light truck brokerage space. Since Landstar doesn't own tractors, only a fleet of trailers, it has much lower operating leverage than pure asset-based truckload carriers. Thus, it enjoys a variable cost structure with relatively low capital intensity that generates solid capital returns—34% on average over the past seven years. Moreover, as one of the largest providers, Landstar has built a vast network of shippers, asset-based truckload carriers, and independent sales agents that support a wide economic moat, in our view. 

Landstar's trucking capacity is unusual for an asset-light broker because it relies in part on captive owner-operators (which the company refers to as business capacity owners), in addition to unaffiliated third-party carriers, to haul freight. BCOs represent roughly half of revenue and haul exclusively for Landstar; most operate fewer than five trucks. The firm pays BCOs a fixed percentage of revenue, which reduces its gross margin (net revenue/gross revenue) variability relative to peers like C.H. Robinson. It also specializes in odd-size freight (roughly one third of sales represents unsided/flatbed business) and irregular routes—factors that bestow incremental competitive differentiation. Additionally, rather than using a captive salesforce, Landstar contracts with a vast network of independent, commission-based sales agents. 

Landstar's immense network of third-party carriers and owner-operators should remain highly valuable to shippers. This is because shippers desire efficient access to the small-carrier base throughout the cycle, and the broader trucking industry will probably continue to face periodic growth constraints due to the stubbornly limited driver pool, including the impact of intensifying regulation. We expect the highway brokerage market to expand at a faster clip on average over our forecast horizon than the combined for-hire trucking and intermodal markets, as large asset-light domestic transportation managers continue to process more truckload and less-than-truckload freight.

Business Strategy & Outlook

In our view, the network effect affords Landstar a wide economic moat. The company's large network of shippers and truck capacity creates a robust value proposition, and duplication by small providers with fewer resources—while not impossible—would be a formidable task. The more parties (suppliers and customers) that use a truck broker's network, the more powerful it becomes. Even many of the relatively recent brokerage startups have discovered the difficulty of driving network scale without pressuring profitability.

Landstar's customer base of more than 30,000 shippers allows for significant buying power. As a result, the company can usually procure capacity more efficiently and at lower rates than shippers could generally obtain directly with carriers. This provides customers with material transportation-related cost savings. Shippers also enjoy the added benefit of outsourcing carrier management and converting fixed transportation costs into variable costs. 

Furthermore, Landstar's network of 10,000-plus captive owner-operators and roughly 98,000 approved and active third-party broker-carriers acts as a valuable source of capacity for shippers. We estimate the firm has the second-largest active capacity network in the industry, following C.H. Robinson. This attribute is highly valuable to shippers throughout the cycle, partly because the capacity base comprises very small carriers and also due to secular constraints on driver availability that often limits truckload industry capacity growth. Additionally, Landstar's broad relationships with truckers as well as air, ocean, and rail carriers support multimodal capabilities that optimize shippers' use of truckload, less-than-truckload, and rail intermodal on the domestic front and air and ocean freight for overseas shipping. Despite periodic bouts of price competition from asset-based truckload carriers on certain short-haul freight, demand for intermodal shipping should remain sound over the long run, driven in part by improving service levels from the rails and shippers' rising focus on supply chain efficiency.

Landstar also represents an attractive source of freight opportunities for carriers, thanks to its ability to aggregate fragmented demand across a broad customer base of shippers. It essentially acts as a market maker for freight. By joining Landstar's network, third-party broker-carriers can reduce empty miles and supplement their sales efforts. Landstar's captive owner-operators (who pay their own operating expenses) benefit further from the ability to choose their own loads because the company does not force dispatch. Owner-operators also have access to discounts on equipment, fuel, and tires, thanks to the company's significant purchasing power. 

While competitors with sufficient capital can usually replicate technology, robust proprietary IT platforms provide differentiation from smaller providers with fewer resources. We expect Landstar to garner additional market share from less capable 3PL competitors as supply chains continue to increase in complexity, requiring sophisticated informational expertise. Landstar's strong technology infrastructure, coupled with its vast reservoir of market data, also enhances its internal pricing decisions and improves customer connectivity and reporting. With regard to the proliferation of digitally focused freight brokers over the past five or six years, Landstar has been responding appropriately to the industry's push for automation, these providers have not disrupted or displaced the large incumbents, and we think the firm can preserve and expand its market share throughout the freight cycle.

Wide

Economic Moat

Landstar System

Landstar System, Inc. engages in the provision of transportation management solutions. It operates through the following segments: Transportation Logistics and Insurance. The Transportation Logistics segment offers transportation services including truckload and less-than-truckload transportation, rail intermodal, air and ocean cargo, project cargo, and customs brokerage. The Insurance segment includes risk and claims management services. The company was founded in January 1991 and is headquartered in Jacksonville, FL.

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