Any business newspaper will tell you that the economy is doing well, and that both trucking and railroads are charging a hefty premium to move goods these days. A quick look at Old Dominion Freight Line's (ODFL +0.25%) earnings results tells you how tight the trucking market really is. Even after expanding capacity, the company was able to extract much higher prices from customers; it posted one of the most efficient quarters in its history.
Here's a look at how the quarter broke down, and at what investors can expect from Old Dominion in the future.
Old Dominion Freight Line's results: The raw numbers
| Metric | Q2 2018 | Q1 2018 | Q2 2017 |
|---|---|---|---|
| Revenue | $1.03 billion | $925 million | $840 million |
| Operating income | $220.4 million | $149.3 million | $160.4 million |
| Net income | $163.4 million | $109.3 million | $98.4 million |
| Diluted EPS | $1.99 | $1.33 | $1.19 |
DATA SOURCE: OLD DOMINION FREIGHT LINE EARNINGS RELEASE. EPS = EARNINGS PER SHARE.
The only thing of note in these results is that the change in tax rates that started at the beginning of the year helped to boost Old Dominion Freight's net income margin.
What happened with Old Dominion Freight Line this quarter?
- Every metric that can be used to measure revenue was up significantly this past quarter. Less than Truckload (LTL) tons and shipments were up 14.6% and 11.2%, respectively; total intercity miles driven were up 15.2%, and LTL revenue per hundredweight excluding fuel surcharges was up 4.1%. The only number that declined in this regard was the average length of haul, but that was only a reduction of 0.2% to 915 miles.
- Unlike in prior quarters, the company didn't disclose its on-time delivery rate or cargo claims ratio, which were previously 99% and 0.3%, respectively. Not to make too many assumptions, but not disclosing these numbers when it's been common practice in other quarters suggests they declined.
- Total employee count was up 16% compared to this time last year, but salaries, wages, and benefits as a percentage of revenue actually declined to 50.5%, which led to an all-time-low operating ratio of 78.7%. Much of that operating-ratio improvement results from higher revenue numbers and the pricing power the company has today.
- Even though capital spending is up, the company generated enough excess cash that management was able to repurchase $47.4 million in shares in the first half of the year.
Image source: Old Dominion Freight Line.
What management had to say
This was CEO Greg Gantt's first quarter at the helm of Old Dominion Freight; he took over for David Congdon, who moved into the executive chairman role. In his press-release statement, Gantt was quick to point out that despite the increase in staffing, Old Dominion continues to run an efficient business:
For the second quarter, the quality of our revenue growth and focus on operating efficiency allowed us to improve many of our cost categories as a percent of revenue. While the rising cost of diesel fuel resulted in operating supplies and expenses increasing as a percent of revenue, salaries, wages and benefits improved to 50.5% of revenue compared to 52.6% for the second quarter of last year despite a 16.2% increase in average full-time employees. We believe this increase in new employees was necessary to maintain our best-in-class service standards while also managing a significant increase in volume, and we will continue to hire during the third quarter based on our outlook for continued growth.
Gantt also concluded with a brief outlook for the trucking industry in general:
With continued strength in the macroeconomic environment and increasing customer demand, we enter the second half of 2018 focused on further investments in capacity to take advantage of growth opportunities. We believe we are uniquely positioned in the LTL industry for additional growth and are confident in our ability to win additional market share while improving earnings and shareholder value.
Looking forward
There is no denying that this was a fantastic quarter. Old Dominion Freight's management is leveraging the strength of the incredibly tight trucking market to generate loads of cash to reinvest in the business. The one question that these results bring up: How much longer will it be able to pass on these kinds of pricing increases before we see demand start to decline? Transportation prices can't continually increase at close to double-digit rates as they have (fuel surcharges included) without causing some customers to balk at the costs of moving goods.
One thing that works in Old Dominion's favor is that it had the size and cash flow to invest in electronic logging devices, which are now a requirement for all trucking companies. Investments in things like this will likely drive smaller players out of the market. So even if we were to see shipping rates decline, there would still be room for Old Dominion to grow by increasing capacity and taking market share.
