Landstar: Trucking Ahead

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Our 12-month target price of 70 values the shares at a p-e of about 27 times our 2009 EPS estimate, at the high end of the company's historical p-e range and above the current forward p-e of its peer group. This is based on our view that if the economy starts to show signs of improvement (as we expect), all logistics stocks are likely to see some p-e expansion. As we see Landstar closing the discount gap with its peers on a p-e basis, we think the shares are likely to see more p-e expansion than the average of its peers.

On a p-e to growth (PEG) basis, based on our 2009 EPS estimate and our assumption of a 15% three-year compound annual growth rate for EPS, Landstar is trading at about 1.3 times, vs. an average of about 1.8 times for its peer group. Our 12-month target price of 70 represents a PEG multiple of 1.8 times, using our 2009 EPS estimate.

Corporate Governance

Standard & Poor's has a generally favorable opinion on Landstar's corporate governance practices, but there are some issues we would like to see addressed.

The company has a staggered board of directors and a supermajority vote is required on many issues. These are not shareholder-friendly policies, in our opinion. The company's chairman of the board, Jeffrey Crowe, was the CEO of the company from 1991 to 2001.

Among the positives we see are Landstar's use of independent directors on all committees; the board is controlled by a supermajority of outside directors; there is no poison pill in place; and all directors and officers own stock in the company.

We think the company is forthright in its communications with analysts and the investing community. It holds a mid-quarter update every quarter in which it updates guidance and gives its view of the business climate. This, plus a quarterly conference call, give investors frequent updates and, in our view, increases visibility into future trends and results. We also believe the calls and investor updates contain a good deal of candor and clarity.

Investment Risks

Risks to our recommendation and target price include the possibility that the U.S. economy slows further, the company loses one of its highly successful agents (the company had 495 agents in 2007 that generated at least $1 million in revenue and one agent in particular generated about $197 million of revenue). The company could also be hit with a large number of accident claims. Landstar is self-insured for the first $5 million per incident in liability for any accident by one of its BCOs.

Other risks include the possibility that capacity in the industry tightens significantly, making it more difficult and/or more expensive for the company to source the capacity it needs. Also, while the company passes along a fuel surcharge to customers, the large increase in fuel costs could have a major dampening effect on demand.

Corridore follows airline stocks for Standard & Poor's Equity Research .