Today’s Buy Opportunity: Landstar

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As a youngin’, I used to wash my parents' minivan to earn money for baseball cards. Every time I climbed the ladder to wash the roof, I'd give thanks that they didn’t drive an 18-wheeler. It shouldn’t come as a surprise, then, that my favorite trucking company doesn’t actually own any trucks.

Hey, no trucks, no washing! Landstar System (Nasdaq: LSTR) takes this mantra a step further: no trucks, low invested capital, low maintenance expenditures, no washing … you get the idea. With a wonderful business model, a truckload of growth prospects, and a price cheap enough to leave change for more trading cards, you should move Landstar out of your blind spot and into your portfolio.

Fast facts on Landstar

Source: Capital IQ, a division of Standard & Poor’s. TTM is trailing 12 months.

Where are the assets?
Landstar’s dirty little secret is that it's a technology company masquerading as a stodgy trucking company, just like eBay is a technology company in retailer’s clothing. Both are simply electronic marketplaces that broker transactions for buyers and sellers, making money by taking a small fraction out of each.

But while eBay is the sultan of superfluous swag, Landstar is the king of crated cargo. The company matches up loads of cargo that need to be delivered with truckers looking for work. No trucks -- just a massive computer network that brings together these otherwise distant parties and maximizes their ability to make money.

Our slice of cargo pie
Here’s how the typical transaction goes down:

1. Agents, acting as independent contractors, find cargo and upload its information (size, weight, destination) into Landstar's online system.
2. Truck drivers log on to the system and find a load that matches their capacity constraints and optimizes their delivery pattern.
3. The truck driver picks up the cargo and brings it to its destination.
4. Everyone (the agent, the trucker, and Landstar) gets paid.

The hard-working truck driver commands the lion's share of each transaction. After all, they’ve done the heavy lifting and deserve 75% of the bounty. The remaining quarter is split between the agent and Landstar.

This arrangement means that Landstar's gross margins are relatively fixed at 17%. With extremely low fixed costs, it can maintain profitability even in the bottom of an economic cycle, and reinvest profits at high returns on capital.

While traditional trucking companies are forced to spend heavily on maintaining their trucks, Landstar simply spends to update its network interface and keep its valuable agents happy. Check out the disparity in returns on invested capital for companies in the trucking sector:

Source: Capital IQ, a division of Standard & Poor’s. TTM is trailing 12 months.

Size matters
Landstar would never be able to get away with siphoning off 17% of the revenue if it weren’t adding significant value for both the agents and truckers. Continuing to do so is the key to the company’s success, and the best way to measure that is by seeing if its network is growing and strengthening.

Over the past decade, Landstar has expanded its network of sales agents to be the largest of any non-asset-based transportation company. With nearly 1,400 agents spread across North America, this army of money-hungry agents seeks out loads that need to be delivered and keeps the Landstar network populated with work for truckers.

On the other side of the network, Landstar has exclusive relationships with 8,500 truckers, and non-exclusive relationships with 24,000 more across the continent. Suffice it to say, delivery capacity is not a problem.

Don’t tailgate the U.S. economy
Landstar’s business can’t help but ebb and flow along with the health of the U.S. economy. But the top brass down in Jacksonville isn’t just idling in park. Last year the company made its first two acquisitions to branch out its services into complete Web-based supply chain management. Now loaded with trucking, rail, air, ocean, and warehousing services, Landstar is driving down the path to be a logistics solution company instead of remaining just a middleman.

The company should continue to grow its core business even while it cuts its teeth in supply chain management. More than $350 billion is spent annually on for-hire intercity trucking, but only 10%-15% currently goes through brokers like Landstar.

While success in its latest venture is far from guaranteed -- there are many large, well-heeled players in the supply chain space -- Landstar shares are priced such that we get any success from this business for free. Furthermore, any upside from a recovering domestic economy or continued shift into brokered trucking could send Landstar’s shares into overdrive.

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