It's hard to drive the highways where I live, in Durham, N.C., without seeing at least one Old Dominion
For the 13th straight quarter, Old Dominion improved its operating ratio (an inverse measure of profitability -- subtract the operating ratio from 100 to get the operating margin). Operating margins improved mostly through controlling wage and benefit costs -- a key advantage of this nonunion trucker.
The trucking sector is doing pretty well of late, as increases in total tons shipped, total shipments, and revenue shipment would all attest. While some of this improvement is no doubt due to an ongoing economic recovery, other factors are at work, too. A slew of bankruptcies a few years back reduced the number of trucks on the road, and new federal regulations have reduced the hours that a trucker can drive in a given week. The rest is basic economics math -- lower supply plus higher demand means better pricing for the survivors.
While trucking companies spent aggressively on new trucks throughout 2004 and the supply shortage is no doubt easing, Old Dominion has a few other tricks up its sleeve. The company continues to expand into new states and make selective "tuck-in" acquisitions when the price is right.
Though a trailing price-to-earnings ration of 21 isn't so cheap, Old Dominion has managed to grow operating income over the past eight years at a compound rate of over 23%. Judging by management's increased guidance for 2005, that growth doesn't look to be slowing down dramatically any time soon. Investors looking to haul in some profits from the trucking sector might want to take a look. But remember to keep both eyes on the road -- trucking is a cyclical business, and this growth won't go on forever.
Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.