Like many companies, Old Dominion Freight Line (ODFL -11.04%) faced challenges in 2022. Increased costs, as well as a slowing economy, impacted the trucking company's results for the year. Even still, the company's performance was impressive, and Old Dominion put up record results.
If the economy can avoid a recession, there's a chance we see a return to a bull market in 2023. If that happens, there are few companies in a better position to capitalize on that change in economic momentum than Old Dominion. Here are three reasons why.
1. Old Dominion is ready for any economy
It may seem surprising, but for an 89-year-old trucking company, Old Dominion is a pretty nimble business. Old Dominion anticipated its volumes increasing during 2022, but the reality didn't meet the company's expectations. One might assume that would mean weak results, but nothing could have been further from the truth.
The recently reported fourth quarter of 2022 was the 10th straight quarter of double-digit, year-over-year earnings per share (EPS) growth, an increase in revenue, as well as an improvement in operating ratio. Looking at full-year results, 2022 was also a record year for revenue and profitability.
Being able to post record results in a year when the economy presented headwinds to expectations speaks to Old Dominion's ability to adjust and reduce costs to ensure the business remains strong. Conversely, if we see a bull market due to an improving economy, Old Dominion will be positioned to benefit.
2. Old Dominion consistently invests its business
Perhaps even more impressive is that these strong results did not prevent Old Dominion from continuing to invest in its future. The company generally invests 10% to 15% of its revenue into capital expenditures each year, and 2022 was no exception.
For the year, Old Dominion spent $775 million on capital expenditures and an additional $300 million in real estate projects that expanded its network. Old Dominion invested in its workforce as well with investments in employee compensation and retirement plans.
3. Old Dominion is built for a surge in demand
The clearest indication of Old Dominion's ability to benefit from a bull market driven by the economy is how it handles its capacity. Old Dominion operates with spare capacity at all times, despite the fact this costs money to do. After all, this means the company is spending money on trucks that are not delivering goods.
However, this strategy paid off over the past few years. When supply chains got tight and other trucking companies were at full capacity, Old Dominion was able to gain market share. Management cites nearly $2 billion in revenue over the past two years that was made possible by being available when customers needed them.
This strategy continues to this day. Over the past two years, Old Dominion graduated more than 1,300 drivers from its driving school and now has many of them working in nondriving roles while demand is slower. Much like the purposeful decision to operate at excess capacity, this comes at a cost to the business. However, when demand returns, as management thinks it will this spring, these employees will be ready to pivot back to driving to help Old Dominion meet demand.
So is Old Dominion a buy?
Old Dominion was built to withstand tough times and capitalize on boom times. Should we see a bull market in 2023, Old Dominion seems like a great investment to make now, as history would suggest the results could be impressive.
And if the bear market remains, Old Dominion has proven its ability to not only weather the hard times but to continue to outperform expectations.
