How the Market Views Less-than-Truckload Carriers
Less-than-truckload carriers’ stock returns
In this final part, we’ll take a look at the valuation of the discussed LTL (less-than-truckload) carriers. In the last one year, the major public LTL operators delivered solid returns except for YRC Worldwide (YRCW). The company returned just 6.7% since September 25, 2016. On the other hand, Georgia-based SAIA (SAIA) returned 100% during the same time. XPO Logistics (XPO), Old Dominion Freight Line (ODFL), and ArcBest (ARCB) returned 80.5%, 60.5%, and 62.4%, respectively.
In fact, during the same period, the less-than-truckload (XLI) carriers have delivered higher returns than their full-truckload counterparts.
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Forward EV-to-EBITDA multiple
We’ll value the less-than-truckload operators using the forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple. Why forward EV-to-EBITDA? This multiple tells us how an LTL carrier is valued for each dollar of EBITDA that it’s expected to earn.
A lower multiple might suggest an undervalued LTL carrier, but it may not be the case always. LTL operators with a high degree of risk may have a low forward EV-to-EBITDA multiple. The risk can be in any form such as financial risk like higher leverage or operational risk. In the discussed LTL peer group, given its past history, YRCW carries relatively higher operational risk.
LTL’s forward EV-to-EBITDA multiple
The above graph shows that Old Dominion has the highest forward EV-to-EBITDA multiple of 11.7x among peers. The company is followed by SAIA with a ratio of 9.3x. Acquisition-hungry XPO ranks third in the group with a multiple of 9.1x. ArcBest has a ratio of 5.8x. Kansas-based YRC Worldwide has the lowest forward EV-to-EBITDA valuation multiple of 4.2x among these companies.
ODFL has the highest operating and EBITDA margins in the peer group followed by SAIA. Plus, the former has very low debt among LTL operators. Thus, the company has a much higher premium, resulting in a higher forward EV-to-EBITDA multiple.