The shipping business has been growing briskly over the past few years thanks to robust economic growth and some regulatory changes in the trucking business. In response, Old Dominion Freight Line (NASDAQ: ODFL) has been spending large amounts on expanding its network. This past quarter, though, industry growth started to cool down, and management acknowledged that revenue growth was not what was expected.
Nevertheless, the company was able to grow its top and bottom lines ahead of analyst expectations thanks to its incredible work on controlling costs. Let's look at Old Dominion Freight Line's most recent quarterly results and how management expects to respond to a potentially slower growth environment.
Old Dominion's results: The raw numbers
|Metric||Q1 2019||Q4 2018||Q1 2018|
|Revenue||$991 million||$1.02 billion||$925 million|
|Operating income||$178.4 million||$218.9 million||$149.3 million|
|Net income||$133.3 million||$159.4 million||$109.3 million|
Data source: Old Dominion Freight Line earnings release.
Now that we have a full year of results following the changes in corporate tax rates, there aren't any significant adjustments to income to make the quarters comparable. Management didn't even elect to break anything out as a one-time expense or consideration between quarters, so this is close to an apples-to-apples comparison for the company this quarter.
What happened with Old Dominion Freight Line this quarter?
- While management acknowledged that revenue growth was slightly below its previous expectations, there were several metrics that show the company is growing its business in a cost-efficient manner. Total less-than-truckload (LTL) shipments were up 2.7% and revenue per shipment excluding fuel surcharges was up 5.2%.
- Investors should expect revenue numbers to keep growing as management announced earlier this month that it was increasing shipping rates by 4.9% effective May 1.
- The one metric that continues to trend downward is tonnage per shipment and total tonnage moved, but management noted in the prior quarter that lower shipment weight is a deliberate decision to reduce heavier shipments in its network.
- Old Dominion continues to deliver incredible efficiency metrics as management noted its operating ratio declined from 83.9% this time last year to 82% in the first quarter. It may not be as impressive as the prior quarter's 78.7% operating ratio, but it certainly keeps the company on track to deliver a second consecutive year of a sub-80% operating ratio.
- Management has trimmed its 2019 capital spending budget from $490 million to $480 million. It's reasonable to expect that management will put more of its free cash flow toward dividends and share repurchases throughout the year.
Image source: Old Dominion Freight Line.
What management had to say
In Old Dominion's press release, CEO Greg Gantt talked about how the company intends to keep investing in its network.
Old Dominion's financial results for the first quarter reflect our team's execution of a plan that has served us well throughout many economic cycles. We believe that the domestic economy and customer demand trends remain favorable, which should continue to support our ability to win market share by providing shippers with superior service at a fair price. The consistent delivery of this value proposition, combined with our commitment to regularly invest in our network capacity, provides us with further opportunities to produce long-term profitable growth and increase shareholder value.
Reading between the lines of Gantt's quote and Old Dominion Freight's revenue results, it would appear that truck transportation demand is slowing down slightly. That may not necessarily be a bad thing for Old Dominion because there is still plenty of room to capture market share from less-efficient direct competitors as well as take market from full truckload (FTL) shippers.
With electronic logging a requirement across the trucking industry, it is likely going to move some FTL shipments to LTL shippers. That's a huge market opportunity for Old Dominion because the FTL market in the U.S. is more than six times that of the LTL market today.
So it's likely that we will see slower revenue growth, but growth nonetheless for Old Dominion.
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