When economic uncertainty lingers, investors often seek out durable, high-quality businesses. One company that fits the bill is Old Dominion Freight Line (ODFL -1.14%). Even better, the stock is arguably on sale today. Shares of the less-than-truckload freight specialist are down more than 30% from their 52-week high. That pullback might look concerning at first glance. But, for long-term investors, this decline could be an opportunity.
Sure, the company's earnings have pulled back during a cyclical downturn in freight. But they could improve drastically if consumer confidence improves and the economy ramps up. Here's why investors shouldn't wait for the economy to improve before considering buying shares of this dividend payer, with its strong balance sheet and proven pricing power.
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An excellent operator
To an uninformed investor, Old Dominion's recent business performance may appear bleak. First-quarter results reflect a decline in shipments amid a broader market slowdown in freight volumes, with revenue declining 5.8% year over year to $1.37 billion. Net income declined nearly 13% to about $255 million, and diluted earnings per share fell to $1.19 from $1.34 in the year-ago period.
But there's still a lot to like.
Despite these declines in key financial metrics, Old Dominion still maintained a stellar 75.4% operating ratio (which is operating expenses divided by revenue). While this was slightly higher than the 73.5% ratio a year ago, reflecting some margin compression, it's still far better than what most freight carriers can achieve.
Furthermore, the freight company's yield performance (that is, revenue earned per unit of weight) remains solid. For instance, the company's first-quarter revenue per hundredweight, excluding fuel surcharges, increased 4.1% year over year. This increase in yield during a time of weakness in shipments underscores Old Dominion's pricing power even in a softer freight environment. For comparison, the company rolled out a 4.9% increase in pricing late last year.
Investing through the cycle
Importantly, Old Dominion's challenges aren't due to any poor execution on the company's part; they're cyclical. Management attributed its recent decline in shipments to broad-based economic weakness, including lower consumer and industrial demand. But this hasn't put the company on defense.
Despite a cyclical downturn in freight over the past two years, Old Dominion has continued investing aggressively in its network. The freight company has spent $1.5 billion on capital expenditures over this period. The company's CFO, Adam Satterfield, said in Old Dominion's first-quarter earnings call that these investments reflect the company's confidence in future market share opportunities.
"We have plenty of capacity within our service center network to accommodate future growth due to these ongoing investments," Satterfield explained.
Responding to a persistently uncertain macroeconomic environment for freight, the company is also scaling back its capital expenditure plan for the year -- but only slightly. Old Dominion will spend around $450 million, down $125 million from what it was previously planning to spend in 2025. Still, $450 million is a considerable sum. The revised figure reflects both management's flexibility and its confidence in the company's ability to take market share over time and to benefit when economic growth picks back up.
Aggressively returning capital to shareholders
Meanwhile, Old Dominion remains the standout dividend stock it has been for years. In February, the company increased its quarterly dividend by 7.7% to $0.28 per share. This gives the stock a dividend yield of about 0.7%.
In addition, Old Dominion returns capital to shareholders through share repurchases. During Q1 alone, Old Dominion repurchased about $201 million worth of its own shares. This, of course, was on top of the approximately $60 million it paid in dividends. That means more than $260 million was returned to shareholders in just three months -- equal to more than 100% of net income for the quarter.
Waiting to buy shares could be a mistake
Yes, there are risks. Thanks to a cloudy economic backdrop, freight volumes may remain sluggish in the near term. And things could remain this way for longer than expected. But this pullback in the stock price may price in most of the company's risks.
Sure, trading at about 30 times trailing earnings, the stock doesn't look cheap. But if the economy recovers and the company is able to fully utilize its excess capacity, earnings will benefit from both a surge in revenue and operating leverage. That could cause the stock to soar. With that in mind, a price-to-earnings ratio of about 30 when earnings are cyclically depressed is actually quite a cheap valuation for one of the world's best trucking companies.
Buying the dip in Old Dominion Freight Line shares during difficult and uncertain economic times may require a leap of faith. But when the next economic boom is under way, investors will likely be glad they had the courage to buy this stock while it was down -- and before the clouds cleared.
