The U.S. trucking industry is working hard throughout the novel coronavirus crisis to resupply the run on consumer staples everywhere. Among competitors, Old Dominion Freight Line (NASDAQ:ODFL) stands out as a quality company with good long-term prospects beyond the temporary trucking industry market bump.
Old Dominion Freight Line now commands about 10% market share of less-than-truckload (LTL) freight shipments. The company is on an upward trajectory, having total shipment growth of 58% between 2011 and 2019. To give some perspective, the growth percentages for its six closest competitors ranged between negative 14% and 31% during the same time period.
Old Dominion is in for the long haul
Founded in 1934, Old Dominion Freight Line originated as a single truck running a 94-mile route in Virginia. Over the next 80+ years, the company became a national less-than-truckload (LTL) freight transportation company.
As Old Dominion grew, management reinforced the notion that improving the quality of its service would justify premium prices but still produce gains in market share. Management was right.
In 2002 Old Dominion's on-time delivery was 94%. By 2019 its on-time delivery had improved to 99%. Additionally, its cargo claim ratio declined from 1.5% in 2002 to 0.02% in 2019. Sure enough, the company's performance improvement made premium prices a non-issue for customers.
Revenue per shipment increased an average of 4.3% every year between 2009 and 2019, adding up to a quadruple increase over a decade. That's a pretty impressive statistic, but reflective of the value shippers put on reliability and quality of service when loads simply have to get there on time. Maintaining pricing discipline isn't always easy, but the resolve of Old Dominion management has produced impressive revenue growth and rewarded investors handsomely.
The successful record of Old Dominion Freight is even more admirable because LTL shipping is a tricky business. Efficient consolidating of small deliveries to multiple destinations is the key, and Old Dominion has emerged as a leader in shipment management. New customers are noticing in increasing numbers.
On the road to increasing shareholder value
Of course, attracting new customers requires an infrastructure capable of supporting an exceptional customer experience. Building and maintaining that infrastructure requires constant attention and regular infusions of capital.
Old Dominion built its infrastructure over many years and continues to update and add to it regularly. The company has 237 service centers in 48 states and is adding another 27. It has invested $1.5 billion in service center expansions and additions since 2010.
The convenience of service centers makes it easier for Old Dominion to expand its network and start attracting incremental loads that fill trucks. At that point, economies of scale start kicking in and well-built LTL trucking firms build market share quickly.
Last year was a challenging one for most LTL freight companies. Ongoing tariff issues with various countries decreased the number of shipments for most of the year. While the current COVID-19 health crisis has disrupted supply chain flows in the U.S., I think Old Dominion will come back quickly as the situation eases and finally returns to normal.
Despite a period of industrial slowdown last year, Old Dominion was able to increase prices. Compared to 2018, LTL revenue per hundredweight increased by 7.3% in 2019, reflecting the value customers placed on dependable service. The company chose not to cut prices to gain market share, but instead relied on quality service. That strategy results in real market share growth built with customer loyalty, instead of simply new customers shopping solely on price, ready to jump to the next cheaper deal when it comes along.
What does this mean for investors?
In the past month, the stock market has dropped precipitously, as panic selling took over rational thinking. Caught in the downdraft was Old Dominion Freight Line, a quality company with good long-term prospects. In the past month, Old Dominion's stock price has dropped 23%, creating an attractive valuation for investors.
Old Dominion has demonstrated resilience in the face of downturns in the trucking industry, as its 2019 performance illustrated. The company increased shipments while increasing prices. Earnings per share (EPS) increased to $7.66 in 2019 versus $7.38 in 2018, a 3.8% increase.
Contrast that with this statistic: At least 795 trucking companies failed in 2019, with 24,000 trucks removed from the nation's capacity.
I believe Old Dominion has a multiyear growth trajectory ahead. The pricing discipline and market share gains in 2019 indicate a quick recovery once supply chain movement returns to normal. The current share price presents a good opportunity for the long-term investor to scoop up shares in a quality company at a low price.