Landstar: Trucking Ahead

S&P says the transportation company is well positioned to benefit from any strengthening in the U.S. economy, ranking the shares a strong buy

by Jim Corridore From Standard & Poor's Equity Research

We think Landstar System (LSTR; recent price, 53), a non-asset-based transportation company, has an extremely flexible strategy that limits its exposure to economic downturns while allowing it to rapidly ramp up operations when the economy improves. We think this model reduces balance sheet risk by limiting necessary investments in physical assets such as trucks and other equipment, but also allows the company to rapidly scale up operations during periods of economic strength and strong transportation demand.

In our view, the company is well positioned to benefit from any strengthening in the U.S. economy in the latter half of the year. Even if the U.S. economy does not start to strengthen, we expect Landstar to increase revenues and earnings on market share gains, additional penetration into existing customer accounts, and growth of a new revenue stream from its recently started warehousing business.

We believe Landstar stock is likely to show an expansion in its price-earnings (p-e) ratio on improvement in the U.S. economy. Also, we think Landstar should be able to close the discount it trades at compared to peers as it expands its use of brokers, and increases its penetration into the intermodal business.

The stock carries Standard & Poor's highest investment recommendation of 5 STARS (strong buy).

Company Profile

Headquartered in Jacksonville, Fla., Landstar operates through independent owner-operator truck drivers and independent brokers who match companies that need transportation services with the capacity to ship those goods. Landstar's independent commissioned brokers locate freight and coordinate the transportation of that freight by the company's independent owner-operator truck drivers or a third party.

Through this model, Landstar limits its fixed costs and necessary investments in fixed assets, leading to a more variable cost structure that can be ramped up in periods of high demand and scaled back during periods of shipping or economic weakness.

The company compensates its 8,050 business capacity owners (BCOs, its term for its independent owner-operator truck drivers) by sharing a percentage of the revenue generated by the freight hauled (between 60% to 79% of the revenue generated). BCOs must pay substantially all the costs of operating their own equipment including driver wages and benefits, fuel, physical damage insurance, maintenance, and highway use taxes. This not only limits Landstar's exposure to rising fuel and other costs, it increases the visibility and predictability of the company's revenue stream, in our view.

Landstar's BCOs can view a complete listing of all available freight on an Internet Web site operated by the company, allowing them to consider rate, size, origin, and destination when planning trips. The company believes the way it compensates its BCOs, combined with the way it allows them to pick their own freight and routes, is an attractive business model and generally leads to higher compensation for the BCO and a lower turnover rate for the company.

The company believes it has more independent sales agents than any other non-asset-based transportation company. These 1,397 agents (at yearend 2007) receive a percentage of between 5% to 8% of the revenue they generate. Landstar maintains a network of more than 25,000 truck brokerage carriers who provide hauling capacity to the company. These providers are paid either a negotiated or contractual rate for each load they haul. In addition, the company maintains relationships with third-party rail, air, ocean, and other types of capacity.

In 2007, Landstar began ramping up revenues from its new outsourced warehousing business; it has exclusive relationships with 128 warehouse capacity owners (WCOs) throughout the country. The company will sell this capacity using a single warehouse information technology system. The WCO will be paid a fixed percentage of the revenues generated through the storage services provided by their warehouse.