Marcial: Old Dominion, a Trucker for the Long Haul

How U.S. trucking firms are faring is a handy indicator of the state of the economy. Not surprisingly, the trucking industry has been having a tough time since 2007 as freight demand has tumbled because of the economic downturn.

Analysts forecast that industry earnings will continue to stay under pressure through the end of 2009, but they point out that certain trucking companies are bound to drive themselves out of the economic rut sooner than others.

One such trucker whose stock has started to rebound amid signs of an economic recovery—including the Oct. 29 release of the first positive quarterly GDP report since the second quarter of 2008—is Old Dominion Freight Line (ODFL), the sixth-largest U.S, provider of "less-than-truckload" (cargo weighing less than 10,000 pounds) freight transportation. It primarily provides short-haul services from its network of 206 service centers to destinations in 48 states, transporting within one to five days all types of commodities, including consumer and capital goods. In 2008, Old Dominion's average length of haul was 901 miles.

Despite weakened sales and soft earnings in the past year and a half, shares of Old Dominion have performed well, climbing from a 52-week low of 18.47 a share last Nov. 11 to a 52-week high of 38.75 on Aug. 26, 2009. It has since eased to 27, partly because of profit taking, as some analysts turned sour on the stock when the company missed this year's third-quarter earnings forecasts.

Even so, some bulls figure the stock will surpass its 52-week high and hit 40 in a year.

pricing discipline"We view Old Dominion as one of the most attractive investment vehicles to capitalize on in an economic recovery and industry consolidation," says Jack Waldo, trucking industry analyst at investment outfit Stephens, which has done banking for Old Dominion. He rates the stock overweight, with a 12-month target of 40 a share.

"For the long term, Old Dominion is one of our favorite names due to its breadth of coverage, best-in-class margins, and substantial growth potential," says Waldo.

One of the fastest-growing trucking companies, with revenues of $1.5 billion in 2008, Old Dominion has adhered to its pricing discipline throughout the recession, refusing to provide significant price relief to its customers, which analysts say put the company in a better position to participate fully in the recovery.

"We don't need to rush to jack up prices when the recovery comes," Old Dominion CEO and President David S. Congdon told BusinessWeek. The company, he adds, has been able to stick to its pricing discipline without losing customers, largely because of its diversified and cost-efficient operations. For one thing, no single customer accounts for more than 5% of revenues, he says. And its largest 20 clients generate only 16% of total sales. Also noteworthy, says Congdon, whose family founded the company 75 years ago, is that Old Dominion has kept its loss claims (such as damaged goods or delayed shipments) from customers to a much lower level than the industry average.

Old Dominion's revenues over the past nine years have grown at an annual 15% rate, compared with 6% for the trucking industry, notes analyst Kevin Kirkeby of Standard & Poor's, who rates the stock a "strong buy." Carriers that transport less-than-truckload freight usually have large fixed costs, notes Kirkeby, so typically they experience a strong earnings rebound when the economy starts to recover.

consolidation could lead to market shareOld Dominion stands to be the "largest benefactor" of any jump in freight volume when the recovery gains more traction, says John Barnes, transportation analyst at RBC Capital Markets, who rates the stock outperform. And if any consolidation in the industry occurs, he says, Old Dominion will be a big winner, as it's well-positioned to capture more market share. He is referring to speculation that YRC Worldwide (YRCW), operator of the Yellow, Roadway, and New Penn lines, which posted a third-quarter loss on Oct. 30, may file for Chapter 11 bankruptcy protection.

YRC CEO William D. Zollars tried to squelch such speculation. He told analysts in a conference call on Oct. 30 that the company, which Bloomberg reports cut about 900 more workers in the third quarter, will "right-size itself" by next year. He said it is in discussions with some bondholders that would allow the company to get access to more cash. "I don't think there's anything that would make us think we can't be back there at some point," Zollars said. The economic recovery is a key, he says, but longer term, "we think there is no reason we won't get back in improved financial condition." A YRC spokeswoman told BusinessWeek there's no reason for filing for bankruptcy and that "it definitely won't happen."

At any rate, Stephens' analyst Waldo says that in the event YRC "fails" and files for Chapter 11 reorganization, Old Dominion should be one of the major beneficiaries. He figures it would provide a big boost to Old Dominion's earnings next year, and profits in 2010 would definitely exceed his current estimate of $1.35 a share. His present estimate for 2009 is 93¢, down from 2008's $1.84.

Regardless of what happens to YRC, analysts are betting on Old Dominion to be a big winner in an economic recovery. "We continue to view Old Dominion as the preferred way to play an eventual recovery," says analyst Jon A. Langenfeld of investment firm Robert W. Baird, who rates the stock outperform.

Some large U.S. institutional investors are also betting on Old Dominion for the long run, including Barclays Global Investors, which owns 5.1%, and Fidelity Management with 4.5%. The Congdon family owns the largest block of company stock, with a stake of about 32%. CEO David Congdon owns 5.6%. "With the help of an able management team, through tough and good times we have performed very well," he says.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Before it's here, it's on the Bloomberg Terminal.