Please ensure Javascript is enabled for purposes of website accessibility

Why Shares in Old Dominion Freight Line Surged in August

By Lee Samaha – Sep 7, 2020 at 4:49PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The freight market is coming back as the economy opens up again.

What happened

Shares in less-than-truckload freight company Old Dominion Freight Line (ODFL -1.70%) rose 10.6% in August, according to data provided by S&P Global Market Intelligence. The move comes as a consequence of some outstanding operational performance by the company. In addition, management sees an improving end-market outlook, as trucking markets recover from stay-at-home measures imposed on the economy due to the COVID-19 pandemic.

A freight truck on the road.

Image source: Getty Images.

Old Dominion reported its second-quarter results at the end of July, and the market was left impressed by how the company dealt with the crisis. Although total revenue declined by 15.5% in Q2, and operating income fell 15.1%, management was able to actually improve some key metrics.

Probably the most important number for transportation companies, like railroads and trucking, is the operating ratio (OR). It's defined as operating expenses divided by revenue, so a lower number is better. As you can see, a slight improvement in the OR helped offset significant declines in revenue -- no mean feat considering the disruption caused to the economy.

Old Dominion Freight Line

Second Quarter 2020

Second Quarter 2019

First Half 2020

First Half 2019

Revenue

$896 million

$1,061 million

$1,884 million

$2,051 million

Operating Ratio

77.8%

77.9%

79.7%

79.9%

Operating Income

$199 million

$234 million

$382 million

$413 million

Data source: Old Dominion Freight Line.

Digging into the details of the second quarter, it's clear that management offset 16.6% year-over-year decline in shipments-per-day by increasing its weight-per-shipment by 5.3% to 1,636 pounds, and revenue-per-shipment increased 1.4% to $357.7.

Turning to the end-markets outlook, during the earnings call at the end of July, CFO Adam Satterfield said revenue-per-day was down 19.3% in April on a year-over-year basis, then down 11.4% in June (year-over-year basis), and then down around 3% in July. Clearly, the trend is improving.

Fast forward to the recent trading update, and August revenue-per-day actually increased by 1.3% compared to August 2019.

So what

In a nutshell, management has demonstrated it can improve underlying profitability in a downturn. That's something that should stand the company in good stead as truck tonnage improves. Indeed, the American Trucking Association Chief Economist Bob Costello recently noted that for-hire contract tonnage fell 5.1% in July compared to June: "It is likely that tonnage was down because many fleets didn't have the capacity to take advantage of stronger retail freight volumes. Therefore, much of that overflow freight moved to the spot market, which did increase in July."

Now what

Investors will be hoping that Old Dominion can continue to take advantage of a recovering market and continue to improve its OR, so it can leverage revenue growth into earnings growth. However, much will depend on the shape of the recovery.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Old Dominion Freight Line. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Old Dominion Freight Line Stock Quote
Old Dominion Freight Line
ODFL
$289.00 (-1.70%) $-4.99

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.