Shares in less-than-truckload (LTL) shipping company Old Dominion Freight Line (ODFL -1.45%) soared 53.7% in 2019, according to data provided by S&P Global Market Intelligence. The move is remarkable, considering the difficult economic environment that the industrial-focused shipper has faced in 2019: Industrial production has failed to meet expectations, and a trade war negatively impacted global trade.
As anyone investing in the transportation sector (such as trucking or railroad stocks) knows, revenue can be highly cyclical, and 2019 definitely wasn't a vintage year. That said, just how did Old Dominion generate such good stock performance in 2019?
In a nutshell, it comes down to the excellence of management's execution. In fact, Old Dominion has won the admiration of none other than Fred Smith, CEO of FedEx (FDX 0.07%). FedEx also offers LTL services, and during a FedEx earnings call, Smith made it clear that Old Dominion is the one company that "does better than we do" in LTL.
He went on to explain:
Old Dominion operates a network that has, I believe, somewhere in the 200-and-some-odd stations, versus our 360. They don't deliver every day to every part of the United States. And they've been very brilliant in finding a niche that's, for lack of a better term, near-TL.
Smith's commentary highlights the work done by Old Dominion in growing revenue and earnings in an uncertain environment.
That said, even Old Dominion can't hold off the pressure of declining end markets forever. Indeed, the third-quarter earnings released in October saw revenue declining nearly 1%, and the operating ratio (a comparison of operating expenses to revenue -- smaller numbers are better) increased to 79.3% from 78.4% in the same quarter of last year. All told, operating income fell nearly 5% to $217.5 million in the third quarter.
The key question now is not about near-term trends -- they are declining -- but whether the industrial economy will pick up in the second half of 2020, as some are expecting it to do. The company's trailing price-to-earnings ratio of 25 seems to imply some optimism is being built in on that front. Time will tell if it's deserved.