Execution Intact, but Old Dominion's Demand Backdrop Remains Unfavorable

Senior Equity Analyst

Matthew Young

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Following impressive growth over the past decade, Old Dominion Freight Line is the second-largest US less-than-truckload carrier by revenue (after 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, the company 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 kept their service center footprint relatively 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. 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. Market share gains were especially strong in 2020 and 2021 as LTL freight demand spiked on the back of robust retailer inventory 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, exceptional operational execution and consistent market share gains have translated into superior lane density and industry-leading margins.

Business Strategy & Outlook

In 2023, we upgraded our moat rating for Old Dominion to narrow from none. As with the rest of the truckload and less-than-truckload companies we cover, we historically considered Old Dominion a no-moat company, despite its impressive execution and robust economic profit. This is because it is extremely difficult to build a maintainable competitive edge in LTL shipping. Network service quality (on-time performance, damage claims) and superior internal processes that optimize line-haul and pickup and delivery efficiency are replicable by well-capitalized competitors over time. Also, for most carriers, scale economies have proved insufficient to produce economic profit over the full cycle. Along these lines, we previously believed that a handful of competitors like XPO, Saia, and FedEx Freight would improve their execution, materially boost terminal capacity investment, and temper Old Dominion's ability to take market share, thus reining in its robust growth profile, seemingly limitless profitability gains, and exceptional capital returns. However, although those carriers have made progress, it’s been much slower than expected, and they haven’t discernably disrupted OD’s impressive performance. 

In our view, OD is best characterized as having a narrow moat rooted in unmatched network/route density, which drives material cost advantages (and industry-leading margins) relative to the several hundred providers operating across the LTL landscape. Since LTL carriers consolidate freight from multiple shippers using a relay system of break-bulk terminals, higher levels of freight volume (tonnage) flowing through a network bestows greater terminal/truck utilization (leverage over fixed costs). Thanks to decades of unwavering terminal capacity investment and incessant market share gains, we believe OD has distinctively built a freight density advantage that's durable enough to support meaningful economic profit (on average) throughout the freight cycle, despite the price competitive nature of LTL shipping. 

OD is unique in this regard, and we don’t have the same conviction for the other large high-quality LTL carriers we cover. OD’s capital returns averaged 15% between 2006 and 2019 (before the pandemic-driven freight surge), far above its 9% cost of capital; this period included the Great Recession, when countless struggling LTL carriers on the brink of collapse slashed prices to unmaintainable levels in a desperate attempt to grab volume and stay alive. In fact, OD’s capital returns impressively stayed positive during the recession (6% in 2009) while most, if not all, other public carriers saw them flip negative. LTL industry average capital returns between 2006 and 2019 (representing a few full freight cycles) approximated a paltry 5.5%, well below average cost of capital. Capital returns surged for all LTL carriers in 2021 and 2022, but they normalized a bit in 2023 on retail sector destocking and softer industrial end markets. 

How did OD build a moat in such a highly competitive business? Steadfast investment in terminal capacity and service quality (for example, industry-leading on-time and damage-claims performance) enabled it to steadily gain market share over the past two decades. We roughly estimate OD doubled its market share (to around 7%) over the last decade alone. While unusual, we believe robust share gains—which have driven well-above-industry tonnage growth—lifted OD’s lane density enough to support exceptional economic profit throughout the freight cycle. We consider it more likely than not that the magnitude of this density advantage is sufficient to keep OD’s capital returns above cost of capital a decade from now, despite cyclical pricing variability and several peers becoming more capable competitors. 

In terms of why disciplined network investment enabled OD to gain share, terminal capacity growth across the industry has lagged tonnage growth (on average) since the Great Recession. Most carriers were badly burned by irrational rate-setting and painful oversupply during the recession, and that institutional memory has held strong. Thus, most large national carriers have spent the past decade focused on bolstering profitability and cash flow generation rather than network expansion. Also, execution at a few very large providers like UPS Freight (acquired by TFI) hasn't been stellar. In contrast, OD kept its head above water during the Great Recession, avoiding irrational rate-setting while uniquely pressing on with terminal investment, a dynamic that’s persisted. Consequently, OD has been better positioned to capitalize on cyclical upturns in freight demand—while most other carriers have been capacity-constrained—with help from best-in-class network service.

This dynamic has also benefited from high barriers to entry in LTL shipping rooted in the need for a broad network of consolidation terminals—including real estate, which can be scarce—as well as a large fleet of trucks and sophisticated load path planning software. From what we can tell, no new carriers have entered the industry in recent memory and there have been several failures of large providers over the years.

Narrow

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 Q3 2020

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ODFL achieves record revenue and profitability, navigates economic challenges

Old Dominion Freight Line (ODFL) delivered strong financial results in Q4 2022, showcasing resilience amidst economic challenges. The company's focus on revenue growth, cost management, and strategic investments underscores its commitment to long-term success.

Old Dominion Freight Line (ODFL) reports mixed Q1 performance

Old Dominion Freight Line (ODFL) reported mixed performance in Q1 2023 with revenue of $1.4 billion, a 73.4% operating ratio, and $2.58 earnings per diluted share. While facing challenges like softer demand and pricing pressures, the company remains committed to its strategic plan and cost management. Opportunities lie in responding to volume acceleration and improving fleet efficiency.

Old Dominion Freight Line reports resilient Q2 performance and eyes growth opportunities

Old Dominion Freight Line navigated revenue challenges by focusing on operational efficiency and customer service. Despite volume decreases, they are optimistic about future trends and remain disciplined on pricing to maintain service quality.

Old Dominion Freight Line (ODFL) reports Q3 challenges and growth opportunities

Old Dominion Freight Line (ODFL) navigated challenges in Q3 2023 with a revenue decrease but remains focused on service quality and market share retention. The company is optimistic about future growth opportunities and operational efficiency.
Despite facing softness in the domestic economy and competitive pressures, ODFL is confident in its ability to address market demand and achieve long-term operational goals. Strategic investments and a strong sales team position them for growth.
ODFL's commitment to service quality, pricing consistency, and operational efficiency underscores their strategy for sustainable growth and market share gains. The company's focus on margin improvement and capacity optimization reflects a proactive stance towards future opportunities.

ODFL reports revenue and earnings growth, eyes volume recovery

Old Dominion Freight Line (ODFL) navigated economic challenges to achieve revenue and earnings growth in Q4 2023. The company's strategic investments, cost management, and customer-centric approach position it for future success amidst industry dynamics. ODFL remains cautiously optimistic about volume recovery and is proactively addressing challenges and opportunities in the market.

Old Dominion Freight Line posts record earnings amidst operational challenges

Old Dominion Freight Line (ODFL) reported solid financial performance in Q1 2024, with revenue growth and record earnings per share, despite operational challenges.
The company's strategic focus on market share, operational efficiency, and service quality positions it well for future growth opportunities and improved margins.
While facing challenges such as service issues and industry disruptions, ODFL remains optimistic about its long-term prospects and aims to capitalize on emerging trends.

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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.

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Less-than-truckload (LTL) carrier Old Dominion Freight Line, Inc. 
ODFL 0.91%
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