Morningstar | Unusually Tight Truckload Market Capacity Creates Robust 2Q Tailwinds for Landstar
Wide-moat highway broker Landstar's second-quarter gross revenue increased a solid 36% year over year, modestly ahead of our forecast on strength in nontrucking services, including its intermodal and global forwarding business. The core truck transportation operations are firing on all cylinders--with robust volume and pricing--and we've already been baking that into our assumptions. Relative to second-quarter 2017, a rapid rebound in spot-pricing conditions across the truckload industry over the past three quarters (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 was largely in line with our forecast. Since our midcycle model assumptions remain intact, we are maintaining our DCF-derived $88 fair value estimate.We anticipate highly favorable operating conditions for moatworthy asset-light truck brokers throughout 2018 (an opinion we've held for more than a year), particularly because widespread adoption of electronic logging devices and the driver shortage will temper asset-based truckers' productivity and keep capacity tight. This backdrop is providing Landstar with a solid runway for healthy pricing gains, especially through the third quarter of 2018, before year-over-year comparisons become more difficult. That said, Landstar's shares are looking rich--a common theme across the U.S. asset-light logistics landscape as investor expectations regarding longer-term cash flow growth have swayed a bit too far to the optimistic side.
In terms of second-quarter highlights, Landstar's gross-revenue on freight hauled by owner operators and third-party broker carriers (combined) grew 36% from the same period last year thanks to persistent strength in revenue per load (up 22%; 21% last quarter) and 11% load growth (12% last quarter). Management noted that favorable demand trends and the unusually robust pricing backdrop have largely continued thus far into the third quarter. The firm expects third-quarter trucking-segment load growth in the ballpark of 8% and increased revenue per load in the range of 19%-22% (year over year).
Total gross profit margin (net revenue over gross revenue) fell 80 basis points, to 22.6%, likely due 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 130 basis points to 31.3% 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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