Retail Destocking and Slowing Industrial Sector Pressuring Old Dominion's LTL Tonnage

Senior Equity Analyst

Matthew Young

Revenue segments as reported by the company.

LTL services revenue

Other services revenue

Revenue Segments

Revenue is the money generated from normal business operations. Gross Profit is revenue minus cost of goods sold. Operating Income is revenue minus cost of goods sold and other operating expenses.

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Operating Income

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Net Income, also called net earnings, is calculated as revenue minus cost of goods sold, operating expenses, depreciation, interest, taxes, and other expenses.

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Gross Profit, Operating Income, and Net Income as a percentage of Revenue

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Margins

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Following impressive growth over the past decade, Old Dominion Freight Line is now the second-largest U.S. less-than-truckload, or LTL, carrier by revenue (following FedEx Freight) and the clear industry leader in terms of execution, freight selection, and service quality, which is no small factor for shippers. Even during the Great Recession, OD kept its head above water via impressive pricing discipline While other carriers slashed rates dramatically, Old Dominion held firm, keeping core revenue per hundredweight flat.

Old Dominion has consistently invested in network capacity over the past decade, spending more than $2 billion, while most other LTL carriers largely kept their service center footprint flat on average. It also boasts best-in-class network service, which is bolstered by handling a higher proportion of its own line-haul needs than peers. In fact, on-time service has exceeded 98% on average since 2008. These factors have enabled the firm to gradually take market share from providers with inferior geographic coverage or lower quality. Share gains were been especially strong in 2020 and 2021 as LTL freight demand spiked on the back of robust retailer restocking and e-commerce-related tailwinds, tightening up capacity across the LTL landscape.

Over the years, Old Dominion has broadened its reach beyond national, long-haul LTL services into the regional market, which enjoys favorable secular themes in terms of e-commerce driving retailers to locate distribution closer to customers. Along these lines, the regionalization of the LTL industry has driven strong growth in Old Dominion's next-day and second-day lanes. Overall, excellent operational execution has translated into industry-leading profitability and consistent market share gains, and we believe that will persist on average throughout the freight cycle.

Business Strategy & Outlook

Old Dominion has a long history of impressive execution in a competitive marketplace. However, as with the other LTL firms we cover, we consider Old Dominion a no-moat company. By no means are we implying that investors should avoid investing in the shares under the right circumstances, and we wouldn’t hesitate recommending this high-quality transport at an adequate margin of safety to our fair value estimate. Rather, the lack of an economic moat highlights the need for investors to be mindful of the cyclical nature of the U.S. trucking industry. 

LTL trucking is asset-intensive (terminals and tractors are expensive) and there are generally limited opportunities to differentiate. In our view, even the best operators (like Old Dominion) struggle to carve out a maintainable competitive edge via the key transportation moat sources, such as cost advantage, switching costs, and network effect. In transportation, moats are more common in asset-light third-party logistics, where the network effect can create value, or among the global express carriers and railroads, both of which benefit from efficient scale or cost advantage.

It is true that entry barriers in LTL shipping are higher than those found in the more fragmented full-truckload space, namely because of the need for a broad network of consolidation terminals, sophisticated load path planning software, and material IT capabilities. At first glance, it might appear that the high-fixed-cost nature of LTL operations should allow for enduring scale-based cost advantages, or perhaps benefits from superior internal processes that optimize line-haul and pickup and delivery efficiency. However, in our view, routines capable of maximizing productivity can be replicated by well-capitalized competitors over time, and scale economies have largely proved insufficient across the industry. The near bankruptcy of industry behemoth YRC Worldwide following the 2009 freight recession stands as a prime example.

The LTL industry has seen several minicycles over the past decade, but overall pricing has proved nicely rational. Even so, we would expect economic profit to moderate during an extended freight downturn that affects retail and industrial end markets across North America. That dynamic was evident throughout the Great Recession, when numerous struggling LTL carriers on the brink of collapse slashed prices to unmaintainable levels in a desperate attempt to grab volume and stay alive. Most of the industry leaders (save for Old Dominion) including YRC, FedEx Freight, and Con-way (now part of XPO Logistics) partook in the irrational behavior. On the positive side, Old Dominion is well positioned to weather downturns. In fact, its returns on invested capital averaged almost 20% over the past decade, far above our 9% cost of capital assumption—a testament to the carrier's best-in-class execution and consistent network investment.

None

Economic Moat

Old Dominion Freight Line

Old Dominion Freight Line, Inc. engages in the provision of less-than-truckload services. The firm offers regional, inter-regional, and national less-than-truckload services. Its services also include container drayage, truckload brokerage, supply chain consulting, and warehousing. The company was founded by Earl Congdon Sr. and Lillian Congdon in 1934 and is headquartered in Thomasville, NC.

Earnings data Q2 2023

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Old Dominion Freight Line, Inc. engages in the provision of regional, inter-regional, and national less-than-truckload services through a single integrated, union-free organization. Its services include container drayage, truckload brokerage, and supply chain consulting. The company was founded by Earl Congdon Sr. and Lillian Congdon in 1934 and is headquartered in Thomasville, NC.

Old Dominion (ODFL) reported earnings 30 days ago. What's next for the stock?

Why Is Old Dominion (ODFL) Down 1% Since Last Earnings Report?

THOMASVILLE, N.C.--(BUSINESS WIRE)--Old Dominion Freight Line, Inc. (Nasdaq: ODFL) today announced that its Board of Directors has declared a quarterly cash dividend of $0.40 per share of common stock, payable on June 21, 2023, to shareholders of record at the close of business on June 7, 2023. This dividend represents a 33.3% increase over the dividend paid in June 2022. Forward-looking statements in this news release are made pursuant to the safe harbor provisions of the Private Securities Li.

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Old Dominion Freight Line, Inc. (ODFL) Q1 2023 Earnings Call Transcript.

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Shares of Old Dominion Freight Line Inc. ODFL sank 5.1% toward a three-month low Wednesday, enough to pace the Dow Jones Transportation Average's DJT premarket decliners, after the trucking company missed quarterly profit expectations for the first time in three years, while revenue missed for a third-straight quarter. “Old Dominion's first quarter financial results reflect continued softness in the domestic economy and a challenging operating environment,” said Chief Executive Greg Gantt.

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THOMASVILLE, N.C.--(BUSINESS WIRE)--Old Dominion Freight Line, Inc. (Nasdaq: ODFL) today announced financial results for the three-month period ended March 31, 2023.   Three Months Ended       March 31,     (In thousands, except per share amounts) 2023   2022   % Chg. Total revenue $ 1,442,136     $ 1,497,280       (3.7 )% LTL services revenue $ 1,424,372     $ 1,475,781       (3.5 )% Other services revenue $ 17,764     $ 21,499       (17.4 )% Operating income $ 383,049     $ 405,618       (5.6.

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News for Old Dominion Freight Line Stock (ODFL)