Morningstar | Landstar’s First-Quarter Pricing Stalls as the Truckload Capacity Crunch Eases but Execution Solid
Wide-moat highway broker Landstar’s first-quarter gross revenue swung negative on a year-over-year basis, falling roughly 1.5%, which came in modestly below our forecast due to softer-than-anticipated pricing (revenue per load). We’ve been expecting Landstar’s truck-transportation rates to decline on tough comparisons and the firm’s high exposure to spot rates, which have been normalizing as the truckload-market capacity crunch has abated. But dry-van truckload capacity proved a bit looser during the quarter than we previously thought. Demand and pricing are not falling off a cliff, but asset-light highway brokers are emerging from an unusually robust operating backdrop (in 2018) and there’s bound to be variability as conditions normalize. That said, Landstar is still outperforming industrywide spot rate trends given its mix of specialized flatbed business, which tends to be sticky, and the flatbed market hasn’t seen as much capacity enter the space. Additionally, gross profit margins (net revenue/gross revenue) and operating margins (EBIT/net revenue) were up nicely thanks to the firm’s variable-cost business model, and both came in ahead of our forecasts.Overall, we tempered our top-line forecast for 2019, and to a lesser degree 2020, but that valuation impact was offset by the time value of money since our previous update and boosting our margin forecasts. Our midcycle revenue and profitably assumptions remain largely intact. We don’t expect to materially alter our DCF-derived $92 fair value estimate. Landstar is performing well despite the pull-back in freight brokerage operating conditions, and it continues to execute its unique agent-based business model impressively. But that’s no secret to investors, and the shares are currently trading in modestly overvalued territory, in our view.
In terms of first-quarter highlights, Landstar’s gross revenue on freight hauled by owner operators and third-party broker carriers (combined) fell about 3% as volume, and pricing trends continued to decelerate sequentially on the back of very tough comparisons, slowing truckload industry freight demand, and an easing of the unusual capacity crunch seen last year; revenue was up a robust 26% for all of 2018. Truck transportation loads increased 2.5% (versus 8% in 2018), while revenue per load declined 5% (versus the 17% rise in 2018). Total gross profit margin (net revenue/gross revenue) increased a solid 70 basis points, to 23.5%, as rates paid to third-party carriers fell more than pricing to customers--a common theme for truck brokers in softening pricing environments. The increased gross margin enabled net revenue to outperform gross revenue and rise about 1.5%. Total operating margin (calculated off net revenue) expanded 190 basis points, to 33.4%, with help from lower insurance and claims expense, lower incentive compensation accruals, and a decline in stock compensation costs.
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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