With the figure for U.S. second-quarter economic growth recently downgraded to 2.6%, and forecasters predicting even lower third-quarter growth, one might think that now is not the best time for a transportation company to expand operations. Trucking concern Celadon (Nasdaq: CLDN ) , though, seems determined not to follow conventional wisdom, and its iconoclasm is likely to translate into long-term value for its investors.
The Indianapolis, Ind.-based company revealed today that it has purchased the truckload business of privately held Digby Truck Lines for $21 million. The purchase includes 270 tractors and 590 trailers; however, Celadon plans to keep just 90 of the newest tractors and 180 of the newest trailers and sell the rest. In addition, it is is seeking to hire 150 of Digby's drivers. The purchase fits neatly into a strategy that has served and likely will continue to serve Celadon very well.
First, the company keeps its fleet relatively new, allowing it to hold the line on maintenance costs and comply with emissions requirements. In addition, the newer fleet helps the company attract and retain qualified drivers, which is the second prong of management's strategy. Celadon has successfully achieved a low turnover rate relative to the industry, helping reduce disruption in its service capacity and lower its hiring expenses.
Further, Celadon has recently shown that its penchant for innovation extends beyond the nuts and bolts operational aspects of its business. As is the case with a lot of firms, rising health-care costs have been weighing on profits. But truckers are particularly vulnerable to health problems that can raise expenses. After all, their job mainly involves sitting, and the eating options at most highway truck stops aren't necessarily conducive to good health. To combat these problems, Celadon is concentrating on preventive medicine by offering drivers the option of seeing health-care professionals on the road for routine screenings and advice on exercise and healthy eating. (Perhaps try the salads at McDonald's (NYSE: MCD ) and Wendy's (NYSE: WEN ) instead of the double-meat burgers and fries?)
These efforts have already shown up in the company's results. Operating margin hit 8.2% in the fiscal fourth quarter ended June 30, compared to 6.4% in 2005's fiscal fourth quarter. While the slowing U.S. economy will present a major challenge to the firm, I believe Celadon's smart moves will keep it growing over the long haul.
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