Morningstar | Old Dominion’s 4Q Revenue Growth Quite Solid Despite Tough Comps; 2019 Outlook Favorable
In the fourth quarter, less-than-truckload carrier Old Dominion’s top line grew 15% (20% for full-year 2018), mostly in line with our forecast. That said, core-pricing trends are holding up better than we anticipated. We were expecting more of a moderation as growth comparisons are becoming tougher. Recall the broader less-than-truckload landscape strengthened significantly in fourth-quarter 2017, in part due to solid U.S. GDP growth and rising spillover freight from the supply constrained full-truckload sector. Additionally, operating margins once again came in ahead of our forecast, as cost management--including headcount trends--remains impressive despite heightened network investment; the firm added seven service centers in 2018. On account of raising our 2019 (and to a lesser extent 2020) top-line and margin forecasts, we expect to boost our $95 fair value estimate slightly by 2%-3%.That said, despite Old Dominion’s outstanding executional prowess, we think the share price continues to effectively bake in overly optimistic midcycle performance assumptions, as investors seem to be overlooking the cyclical nature of trucking. 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%. We forecast roughly an 80% OR for 2019.
Relative to the same period last year, Old Dominion’s fourth-quarter top-line growth was driven by 13% higher yields (9.5% for the full year) and an approximate 3% rise in tonnage (10% for the full year). Underlying LTL freight demand remains healthy, but tonnage trends are facing very tough comparisons and average weight per shipment declined 3% in the quarter, which tempered 6.5% shipment growth. Average revenue-per-hundredweight excluding fuel surcharges was up 11% (6% for the full year). Thanks to robust leverage from revenue growth, increased lane density, and strong yield management, Old Dominion's operating ratio improved 520 basis points, to 78.7%.
Old Dominion Freight Line is a less-than-truckload (LTL) motor carrier providing regional, inter-regional and national LTL services, which include expedited transportation. In addition to the company's primary LTL services, the company provides a range of services including container drayage, truckload brokerage and supply chain consulting. The company also provides access to its systems through multiple gateways that provide its customers and employees flexibility and access to information. The company employs vehicle safety systems, on-board and hand-held computer systems, freight handling systems and logistics technology to reduce costs and transit times.
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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