For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
What Heartland Express does
Heartland Express is a short-to-medium-haul truckload carrier of general commodities within the United States. It primarily is responsible for shipping automotive parts, retail goods, paper products, and packaged food.
In the company's most recently announced quarter in mid-April, it delivered relatively flat year-over-year revenue of $134.3 million but saw rising fuel prices creep higher yet again. That wasn't enough to constrain profits, however, as the company used cost-cutting measures to lower its operating ratio to 77.5% from 82.4% in the year-ago period -- a lower number is more favorable here. Management did note, though, that fuel prices have come in as the company's highest expense in six of the past eight quarters and cost-cutting would be its primary way of counteracting these rising costs in the immediate future.
Whom it competes against
As you might have correctly assumed, the trucking sector is quite a breeding ground of competition. Trucking demand isn't exactly booming right now, with payroll taxes moving up and the uncertainty surrounding the implementation of Obamacare starting to kick in. Therefore, Heartland Express has to contend with hungry competitors who are thus far bucking that trend and rising fuel costs.
Swift Transportation (NYSE: SWFT ) , for example, delivered a 4% increase in revenue this past quarter in spite of having fewer trucks in service. The company was able to realize better utilization of its existing fleet and actually saw fuel prices fall from the previous year. The results were even more robust for Knight Transportation (NYSE: KNX ) , whose shareholders saw revenue rise by 7% as the company grew from the year-ago quarter for the 14th straight time and delivered growth from each of its business segments.
Even the trucking companies that have been struggling are showing signs of life. Just last week, Arkansas Best (NASDAQ: ABFS ) announced a tentative agreement between its ABF Freight Systems subsidiary and the Teamsters union that should dramatically lower costs. Just days later, struggling trucker YRC Worldwide (NASDAQ: YRCW ) , which also reported its first quarterly profit in six years recently, confirmed that it's offered a preliminary proposal to acquire Arkansas Best.
This sector is growing and consolidating, and if Heartland Express isn't willing to adapt, it'll be left in the dust.
After carefully reviewing the prospects for Heartland Express, I've decided to make a CAPScall of outperform on the company.
There are a couple of factors that make me particularly excited about Heartland Express' future. To begin with, the company operates one of the youngest fleets in the country. The average age of the company's tractors is just 2.1 years as the company took delivery of 485 new tractors during the quarter. In addition, it lopped a full year off the average age of its trailers in just the past year (4.1 years to 3.1 years). All around, these big investments are big cost-savers over the long run. Newer fleets offer better fuel efficiency, are more aerodynamic, and often need far fewer repairs than older fleets. This should put Heartland Express in great shape over the next couple of years in terms of lowering its expenses.
Next is the fact that Heartland Express has an immaculate balance sheet. Heartland ended last quarter with $127.5 million in cash and no debt. Now compare that with Swift Transportation, with nearly $1.5 billion in net debt, or YRC's $1.2 billion, and you can see that Heartland has significantly better flexibility than its peers and actually looks like a better buyout candidate than any trucking company in the sector.
Finally, Heartland Express has been extremely efficient at controlling its expenses. This first has to do with the fact that it has no interest expense to worry about as I just noted. The other half of that relates to a finely tuned management team that understands cost-cutting is a way of life in the trucking industry. Unless demand falls off a cliff, Heartland has all the tools in place to remain healthfully profitable.
A smart way to take advantage of rising fuel costs
If you're on the lookout for some currently intriguing energy plays, check out The Motley Fool's "3 Stocks for $100 Oil." For free access to this special report, simply click here now.