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Why Old Dominion Freight Line Commands a Valuation Premium

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Updated

Key stats

Old Dominion Freight Line (ODFL) announced a rise of 2.0% LTL (less-than-truckload) tons in January and 3.2% in February. During the same months, its LTL shipments per day rose by over 6%.

However, the company’s weight per shipment tanked during that two-month period. For May 2016, its LTL shipments per day increased by 0.2%, as compared to May 2015. But LTL tons per day decreased by 1.0%, as compared to May 2015, due to a 1.3% decrease in LTL weight per shipment. ODFL was able to grow in LTL revenue per day.

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For the purpose of valuations, we have considered only YRC Worldwide (YRCW), ArcBest, (ARCB), Saia, (SAIA), XPO Logistics (XPO), and Roadrunner Transportation Systems (RRTS). We haven’t considered J.B. Hunt Transport Services (JBHT) because the company is predominantly a TL (truckload) carrier. These companies run a different operating system and don’t compete for the same freight.

Investors who would like solid exposure to the transportation sector can consider the iShares Transportation Average ETF (IYT), which holds ~11% in trucking companies.

Forward PE multiple

The forward PE (price-to-earnings) multiple represents the dollars payable today for every dollar of next year’s earnings per share. ODFL’s current forward PE multiple is 16.5x, whereas the peer group’s forward PE multiple is 10.5x. This represents a huge 57.1% premium. Below is a breakdown of ODFL’s and its peer group’s historic forward PE multiples from the past five years:

  • Old Dominion’s highest multiple—22.9x
  • peer group’s highest multiple—29x
  • ODFL’s lowest multiple—11.2x
  • peer group’s lowest multiple—7.9x
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Valuation drivers

Unlike many players in the LTL industry, ODFL operates in a non-union labor force environment. This helps the company to avoid unnecessary costs related to negotiations and re-negotiations. The company also hasn’t paid dividends in recent years. Its retained earnings have acted as an internal source of funds, thereby reducing its debt requirements.

The amount ODFL has saved on account of low-interest expenses has also improved its bottom line. The company’s management has also announced another stock buyback program, so we should see ODFL’s EPS going up in quarters to come, despite the pressure on its net income.

Still, the problem of excess capacity for TL operators has compounded pricing pressures in recent months. But LTL carriers such as ODFL don’t have a lot of excess capacity, so it leaves them room for pricing improvements, even if the volumes don’t pick up at a faster pace. This provides scope for ODFL to improve its top line—among other things.

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