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Morningstar | Another Impressive Showing from Top-Shelf LTL Trucker Old Dominion, but Shares Looking Rich. See Updated Analyst Note from 26 Jul 2018

In the second quarter, less-than-truckload carrier Old Dominion reported another quarter of outstanding revenue growth (up 23%) on the back of an unusually favorable operating backdrop in terms of freight demand and pricing conditions. The firm’s top line once again exceeded our expectations, and we raised our 2018 and, to a lesser degree, 2019 revenue forecasts as a result. On the profitability front, increased lane density propped up second-quarter margins to an all time high, also surpassing our forecast run rate for the year. Although our midcycle model assumptions remain mostly intact, we expect to increase our $90 fair value by 4%-5% due to our higher growth forecasts for 2018, as well as from the time value of money since our previous update.

We expect the unusually favorable environment for LTL carriers to persist throughout 2018 as capacity will very likely remain tight in the full-truckload sector due to widespread electronic logging device adoption among small carriers (mandatory as of December 2017). LTL-market capacity probably won’t be as constrained as TL this year, but large LTL carriers like Old Dominion are positioned to benefit from TL spillover freight, as occurred in 2014-15, along with favorable pricing. However, despite the unusually robust operating backdrop, we think the share price continues to bake in overly optimistic long-term performance assumptions, as investors seem to have forgotten the cyclical nature of the trucking industry. Our fair value estimate bakes in a midcycle operating ratio (expenses/revenue) near 81.7% (in 2022), which compares with an adjusted 82.6% in 2017. This assumes average incremental margins of about 20% over our five-year forecast horizon.

Relative to the same period last year, Old Dominion's top-line growth was driven by 7% higher LTL yield (revenue per hundredweight) and an approximate 14.5% rise in tonnage (15.5% last quarter). Average LTL yield excluding fuel surcharges increased about 4%, versus 3.7% last quarter and 2.5% for all of last year (2017). Given robust leverage from tonnage and pricing gains, Old Dominion's operating ratio improved 220 basis points, to a staggering 78.7%, despite a 16% uptick in average employee count to handle strong tonnage growth.