Landstar: Trucking Ahead

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This business was not a significant contributor to revenues in 2007, but we see a slow and steady ramp-up of incremental revenues from third-party warehousing in 2008 and expect this revenue stream to be profitable.

For 2008, we expect revenues to rise about 5.7% (net of fuel surcharges, which do not flow through the income statement), with the growth coming from increased account penetration, market share gains, and new agent additions. Also, we anticipate a strengthening in the U.S. freight environment in the second half of 2008, with the first half likely to see weak volumes and pricing.

In our view, revenue comparisons are no longer likely to be hurt by fluctuating revenues under the disaster relief contract Landstar has with the Federal Aviation Administration (FAA). This was an issue impacting revenue growth rates from 2005 to 2007, as the unpredictability of hurricane activity led to large swings in revenues under this contract. We do not see any material revenue under the contract in 2008, after only $8.5 million in revenues in 2007.

We see operating margins widening to 8.4%, from 8.2% in 2006. Pricing should be flat, but we expect the costs of purchased transportation to drop faster than pricing due to industry overcapacity. We also anticipate operating margins will be helped by leverage fixed costs over a larger revenue base, partly offset by startup costs related to the new warehousing business. We forecast earnings per share to increase 13% in 2008, to $2.25, from $1.99 in 2007. In 2009, we project EPS growth of about 16% to $2.60, on 7% revenue growth and a modest improvement in operating margins.

Market Profile

The overall transportation industry is highly fragmented, with many competitors, and relatively small barriers to entry. However, the customer base is largely captive, as trucking and other transportation services are vital to transport goods throughout the country. Landstar participates in truck, air, ocean, and rail brokerage, which gives it a share of transportation regardless of the method of shipping used.

Growth in the industry within the U.S. is highly correlated to growth of overall U.S. GDP. However, with many small competitors, the opportunity for growth in excess of the industry average through market share gains exists, by our analysis. Larger customers require increased technological sophistication, including the ability to track shipments and efficiently route goods as well as large amounts of capacity. We think this gives companies such as Landstar, which has the necessary size and technology, a competitive advantage over all but a few competitors.

Valuation

Landstar's shares recently traded at a p-e of about 20 times our 2009 EPS estimate of $2.60. (As it is now almost halfway through the second quarter of 2008, we think it is appropriate to look to 2009 earnings.) This valuation is in the middle of Landstar's five-year historical p-e range of 13.5 to 26.2 times. The stock is also trading at a discount to the average forward p-e of 24 times of a group of peers made up of C.H. Robinson Worldwide (CHRW), Expeditors International of Washington (EXPD), and UTI Worldwide (UTIW), based on our 2009 EPS estimates for these companies.

We think Landstar deserves to trade closer in line with these peers, given our view that its business model is converging with those of these companies that are even less asset-intensive. The company's expected three-year earnings growth rate (15%) also compares favorably with the average of these peers (14%), by our analysis. We also believe the stock has been unfairly penalized for some confusion surrounding Landstar's contract with the FAA for disaster relief, which led to large swings in revenues and earnings from 2005 to 2007. We think Landstar has put this issue behind it.