Morningstar | Landstar's 3Q Organic Top-Line Growth Robust, but Brokerage Market Conditions Likely Nearing Peak
Wide-moat highway broker Landstar posted another robust increase in gross revenue, which was up 27% year over year (33% year to date), mostly in line with our expected run rate. The core truck transportation operations are still firing on all cylinders, as they’ve been all year, with solid load-volume growth and historically strong pricing. Growth rates moderated sequentially on tougher comparisons, but we've already been baking that into our assumptions. Relative to third-quarter 2017, a rapid rebound in spot-pricing conditions across the truckload industry (driven by unusually tight capacity) and broad-based demand improvement (dry van and flatbed) drove the overall top-line increase. Landstar’s operating profitability remains very healthy and came in modestly ahead of our forecast. Since our midcycle model assumptions are intact, we don’t expect to materially alter our DCF-derived $92 fair value estimate.Similar to peers C.H. Robinson and Echo Global Logistics, Landstar’s market valuation has decreased to more reasonable levels in recent months following more than a year hovering in what we considered to be overvalued territory. In our view, Landstar’s stock price was previously baking in overly optimistic midcycle growth assumptions (likely rooted in the meteoric rise in spot rates this year), but we think that’s changing as investors realize that operating conditions for asset-light truck brokers, while still robust, are peaking. Tight truckload capacity (linked to widespread electronic logging device adoption among carriers and the driver shortage) has driven significant spot activity to highway brokers this year, while boosting their pricing power. Positive trends will likely hold throughout the rest of 2018, but comparisons will become increasingly challenging (especially in first-half 2019) and spot rates have recently pulled back off historic highs seen during the summer months. Overall, the shares are now roughly trading in fairly valued territory.
In terms of third-quarter highlights, Landstar’s gross revenue on freight hauled by owner-operators and third-party broker carriers (combined) grew 27% from the year-ago period thanks to persistent strength in revenue per load (up 19%; 20% year to date) and 7% load growth (10% year to date). On the call, management noted that changes in revenue per load (pricing) "from June to July and July to August were in line with seasonal trends, while the change from August to September was slightly weaker than recent seasonal trends." Management attributed softening spot rates (on a seasonal basis) to likely softer demand rather than an influx of capacity into the truckload market, particularly in the flatbed niche. That said, the demand and pricing backdrop still appears to be quite healthy (we suspect capacity is still somewhat tight) and isn’t showing worrisome signs of a broad-based pullback thus far into the fourth quarter. The firm expects fourth-quarter trucking segment load growth in the ballpark of 8%-10% and increased revenue per load in the high single digits (year over year). This is roughly in line with what we were previously expecting.
Total gross profit margin (net revenue over gross revenue) fell 40 basis points, to 22.6%, due in part to a mix shift toward more freight hauled by third-party broker carriers (versus owner-operators). Operating profit as a percentage of net revenue improved 420 basis points to an impressive 32.1% on the back of leverage from strong operating conditions.
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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