Marcial: Old Dominion, a Trucker for the Long Haul

One of the fastest-growing trucking companies, Old Dominion is positioned to participate fully in the recovery

Old Dominion Freight Line (ODFL)—52-week stock price

By Gene Marcial

BW's Gene Marcial

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How U.S. trucking firms are faring is a handy indicator of the state of the economy. Not surprisingly, the trucking industry has been having a tough time since 2007 as freight demand has tumbled because of the economic downturn.

Analysts forecast that industry earnings will continue to stay under pressure through the end of 2009, but they point out that certain trucking companies are bound to drive themselves out of the economic rut sooner than others.

One such trucker whose stock has started to rebound amid signs of an economic recovery—including the Oct. 29 release of the first positive quarterly GDP report since the second quarter of 2008—is Old Dominion Freight Line (ODFL), the sixth-largest U.S, provider of "less-than-truckload" (cargo weighing less than 10,000 pounds) freight transportation. It primarily provides short-haul services from its network of 206 service centers to destinations in 48 states, transporting within one to five days all types of commodities, including consumer and capital goods. In 2008, Old Dominion's average length of haul was 901 miles.

Despite weakened sales and soft earnings in the past year and a half, shares of Old Dominion have performed well, climbing from a 52-week low of 18.47 a share last Nov. 11 to a 52-week high of 38.75 on Aug. 26, 2009. It has since eased to 27, partly because of profit taking, as some analysts turned sour on the stock when the company missed this year's third-quarter earnings forecasts.

Even so, some bulls figure the stock will surpass its 52-week high and hit 40 in a year.

pricing discipline

"We view Old Dominion as one of the most attractive investment vehicles to capitalize on in an economic recovery and industry consolidation," says Jack Waldo, trucking industry analyst at investment outfit Stephens, which has done banking for Old Dominion. He rates the stock overweight, with a 12-month target of 40 a share.

"For the long term, Old Dominion is one of our favorite names due to its breadth of coverage, best-in-class margins, and substantial growth potential," says Waldo.

One of the fastest-growing trucking companies, with revenues of $1.5 billion in 2008, Old Dominion has adhered to its pricing discipline throughout the recession, refusing to provide significant price relief to its customers, which analysts say put the company in a better position to participate fully in the recovery.

"We don't need to rush to jack up prices when the recovery comes," Old Dominion CEO and President David S. Congdon told BusinessWeek. The company, he adds, has been able to stick to its pricing discipline without losing customers, largely because of its diversified and cost-efficient operations. For one thing, no single customer accounts for more than 5% of revenues, he says. And its largest 20 clients generate only 16% of total sales. Also noteworthy, says Congdon, whose family founded the company 75 years ago, is that Old Dominion has kept its loss claims (such as damaged goods or delayed shipments) from customers to a much lower level than the industry average.

Old Dominion's revenues over the past nine years have grown at an annual 15% rate, compared with 6% for the trucking industry, notes analyst Kevin Kirkeby of Standard & Poor's, who rates the stock a "strong buy." Carriers that transport less-than-truckload freight usually have large fixed costs, notes Kirkeby, so typically they experience a strong earnings rebound when the economy starts to recover.

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