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Morningstar | LTL Tonnage Hits Speedbump in Old Dominion’s 1Q, But Yields and Execution Still in Fast Lane.

In the first quarter, top-tier less-than-truckload carrier Old Dominion’s top line grew 7%, mostly in line with our forecast. Growth moderated from the 15% year-over-year gain posted last quarter and 20% for all of 2018, but we’ve been expecting that due in part to tough comparisons and more modest freight demand. Operating margins once again came in ahead of our forecast, as cost management (including headcount trends) remains impressive despite heightened network investment in recent years--the firm added 7 service centers in 2018. We modestly lifted our operating margin forecast for 2019, but our longer-term midcycle model assumptions remain largely intact. Nonetheless, we boosted our $99 fair value estimate to $101 on the time value of money since our previous update.

Despite Old Dominion’s outstanding executional prowess, we think the share price continues to bake in overly optimistic midcycle performance assumptions. Our fair value estimate bakes in a midcycle operating ratio (expenses/revenue) near 81.5% in 2023. This compares with a record 79.8% OR and 35% incremental margins posted in 2018, and a five-year average of about 83%.

In terms of first-quarter highlights, the 7% top-line increase stems from continued strength in average yields (revenue per hundredweight), partly offset by a 3% drop in tonnage, which started slowing in the fourth quarter--it was up 3% in the fourth quarter, versus 10% for all of 2018. For tonnage, underlying freight demand across the broader trucking industry has moderated along with slower U.S. economic growth, and Old Dominion is facing challenging comparisons. Additionally, we suspect some of the overflow full-truckload freight that entered the LTL industry during the height of the truckload capacity crunch last year is dissipating. On the pricing front, average yield excluding fuel surcharges was up 9.5% (6% for all of 2018). Solid yield improvement stems from higher core pricing and favorable changes in freight mix.

We note core pricing gains slowed relative to last quarter, and management noted it’s seen some pockets of more competitive pricing conditions recently, and this will be a factor to monitor in the quarters ahead. Thanks to solid cost management, improved dock productivity, and balanced yield management, Old Dominion's operating ratio improved 190 basis points, to 82%. Old Dominion remains by far one of the most profitably providers in the asset-based less-than-truckload industry.