Morningstar | Growth Moderates in Landstar’s 4Q as the Historic Truckload Capacity Crunch Eases, but no Surprises
Wide-moat highway broker Landstar’s fourth-quarter gross revenue was up a healthy 13% year over year (27% for full-year 2018), mostly in line with our expectations. Year-over-year truckload load volume and pricing gains moderated relative to recent quarters, but that wasn’t a surprise. On the demand side, U.S. economic growth has been easing relative to robust trends seen earlier in 2018, and we suspect there was a previous pull forward of some freight demand into the summer months (among retailers and manufacturers) ahead of expected new U.S. tariffs. On the pricing side, the firm is facing very tough comparisons and spot rates have pulled back off record highs as the historic truckload capacity crunch seen throughout 2018 is abating--Landstar has a greater mix of spot business than several of its brokerage peers like C.H. Robinson. That said, despite difficult rate comparisons and a more modest trajectory, demand remains positive heading into the new year, and we expect Landstar to post low-single-digit top-line growth in 2019. Fourth-quarter operating profitability was mostly in line and continued to benefit from overall revenue growth.Since our midcycle model assumptions remain intact, we don’t expect to materially alter our $92 fair value estimate. As we incorporate full-year 2018 financials into our model, we expect any fair value estimate adjustments to be modestly upward. As of Jan. 31, the shares are trading in slightly overvalued territory. That said, valuations across the asset-light logistics space in general have become more reasonable in recent quarters as investors are increasingly aware the highly favorable operating backdrop for highway brokers (capacity disruption, strong pricing, and robust spot opportunities) will likely normalize in 2019; translating into much more moderate revenue and EPS growth. This dynamic has long been baked into our fair value estimate for Landstar and its peers.
In terms of fourth-quarter highlights, Landstar’s gross-revenue on freight hauled by owner operators and third-party broker carriers (combined) grew about 11%, driven by a 7% increase in average revenue per load (16.5% for 2018) and 4% load growth (8% for 2018). The operating backdrop for asset-light highway brokers is normalizing relative to an unusually favorable 2018, but regarding conditions thus far in the first quarter, management commented that the overall environment continues to be “strong by historical standards.†In terms of guidance, management expects first-quarter 2019 trucking-segment load growth in the low single digits and revenue per load to decline at a low-single-digit percentage rate (year over year). On the margin front, operating profit as a percentage of net revenue improved a healthy 210 basis points to 31.6% on the back of leverage from strong operating conditions over the past year.
Landstar System is an asset-light provider of integrated transportation management solutions. The company provides services to its customers across transportation modes, throughout the U.S. and to a lesser extent in Canada and Mexico, and between the U.S. and Canada, Mexico and other countries around the world. The company has two segments: transportation logistics, which provides truck services, rail intermodal services, as well as air and ocean services; and insurance, which is comprised of Signature Insurance Company, an offshore insurance subsidiary, and Risk Management Claim Services, Inc. The company's insurance segment provides risk and claim management services to certain of its operating subsidiaries.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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