Old Dominion Freight Leaves Rivals in the Slow Lane


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About a decade ago, trucking firmOld Dominion Freight Lines ( ODFL ) decided to extend its geographic reach well beyond its traditional base in the Southeast.

The company rapidly worked its way across the U.S., establishing new branches, service centers and routes in the Gulf Coast, Northeast, Midwest, Central Plains and on to the West Coast.

Old Dominion took advantage of its less expensive non-union labor force to beat competitors on price, analysts say. It continuously updated its technology to become more efficient. It went public to raise money for expansion .

In the years since, the company has established itself as a major player in the less-than-truckload (LTT) freight market, which occupies a sort of middle ground between light package delivery and heavy full-truckload freight.

"During its geographic expansion, Old Dominion added substantial increases in overall market share in less-than-truckload. They were taking share from weaker union trucking companies that can't operate as profitably," said David Campbell, logistics industry analyst at Thompson, Davis & Co.

Today, Old Dominion operates in 48 states from coast to coast. It operates international freight services to Canada, the Caribbean, Europe, the Far East, Central America, South America and points in between.

Tractors, Trailers

The company boasts 213 service centers and 28,000 tractors and trailers. Its annual revenue has more than tripled over the past decade, and it ranks No. 2 in market share among the 22 stocks in IBD's transportation-truck group.

Meanwhile, Old Dominion's stock price has been on a steady climb for many years. Shares hit an all-time high of 35.13 on Nov. 6.

With most of its geographic expansion strategy complete, Old Dominion's focus now is on growing business along its established routes. This basically means signing on more customers on certain routes so trucks traveling there can operate more efficiently and profitably.

"Instead of having one truck per day driving from Montana to Chicago, for example, they'll have two trucks driving that route," Campbell said. "There is a lot of growth potential in terms of building more route density. To do so, they must get new customers and shippers, and that involves having good and reliable service."

To improve its service, Old Dominion updates and enhances its computer and information technology systems every year to figure out the most efficient routes to meet demand. Its logistical systems and supply chain solutions are given high marks by analysts as are its above-average industry margins.

"We believe Old Dominion is well positioned as the premier LTT operator and expect it to continue to post above-industry margins," Citigroup analyst Christian Wetherbee noted in a report following Old Dominion's third-quarter earnings release.

Old Dominion's Q3 operating margin of 14.9% established a company record for the third quarter. The margin was up 107 basis points from the prior year, although it came in below some estimates amid higher-than-expected expenses.

Financially, Old Dominion ranks as one of the best performers in the trucking sector, if not the best. The company has run off 10 straight quarters of double-digit sales and profit growth.

Although its quarterly sales growth has decelerated the last five quarters, watchers say part of that is due to the cyclical nature of the trucking business.

"There's not a lot of industry growth recently," Campbell said. "Overall, growth has slowed, but there still is some growth. As long as there's some growth, they're OK."

Old Dominion logged third-quarter sales of $544.5 million, up 10% from the prior year. Earnings gained 31% to 59 cents a share, topping consensus analyst views.

The company continues to post growth in the number of tons per day it hauls, though that growth has been moderating. Year-over-year tonnage growth was 6.6% in the third quarter vs. 9% during the second quarter.

On a monthly basis, the number of tons rose 8.9% in July, 6.3% in August and 6.1% in September. Tonnage in October was growing at a rate of 5.5% to 6% as of Oct. 25, according to a report from JPMorgan analyst Thomas Wadewitz.

"Tonnage growth is better than peers, but moderating to mid-single digits," he noted.

Although Wadewitz says Old Dominion's third-quarter results were "a little less excellent" than usual, he still gave the company high marks for its overall performance. He also called Old Dominion the "best-in-class LTT name" and said the firm "is likely to continue delivering strong execution."

Strong Competitors

The biggest stock in IBD's trucking group by market value isJBHunt Transport Services ( JBHT ), which specializes in full-truckload freight. It also has been on a strong run of late, posting double-digit sales and earnings gains in 10 of the past 11 quarters.

Old Dominion also competes against package delivery specialists, such asFedEx ( FDX ) andUnited Parcel Service ( UPS ) as well as traditional freight truckers likeCon-way ( CNW ) and Yellow Roadway.

Analyst Campbell says Old Dominion's focus on a specific market niche gives it an advantage over many of its rivals.

"The Old Dominion story is focused on less-than-truckload," he said. "It's not focused on e-commerce or small packages. They have a sharp focus, which helps drive their profit."

Analysts polled by Thomson Reuters expect Old Dominion to grow full-year earnings 23% in 2012 and 14% in 2013.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Investing Ideas
Referenced Stocks: CNW , FDX , JBHT , ODFL , UPS

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