The transportation business was good to Landstar System (NASDAQ:LSTR) in the first quarter. Revenue climbed 19% and earnings climbed 38% (stripping out an accident settlement in the previous year) as the company boosted its operating margin.
So, what's with the System part of the name? Well, Landstar isn't your normal trucking company. Instead of owning and operating trucks, Landstar acts as a middleman -- coordinating independent truckers, shippers, and transport brokers/agents, while keeping a little cut for itself.
As you might then expect, this sort of arrangement means that Landstar doesn't generate particularly high margins, but it does generate considerable returns on capital. Annualizing the results seen in the first quarter, Landstar would be on pace to post a 45% return on equity for the year and a 30% return on capital -- exceptionally high numbers in almost any industry.
Putting aside a small percentage of revenue that comes from rail, air, and ocean carriers in the company's multimodal business, most of what Landstar does is trucking.
At present, the bulk of the company's revenue comes through independent contractors who sign exclusive lease arrangements with Landstar. These contractors are paid a percentage of the revenue of the loads they haul but are essentially responsible for their own expenses. Turnover among these contractors has been exceptionally low -- a major boon to Landstar given the tight market for good operators these days.
In addition to these independent contractors, the company is also increasingly using third-party truck capacity providers (truck brokerage). In the first quarter, carrier segment revenue from this group increased nearly 80%, and the growth from truck brokerage in the multimodal segment was above 45%.
The advantage of using truck brokerage is that it gives the company considerable flexibility: It can add capacity when demand is high without any sort of long-term commitment. What's more, these third-party carriers are often willing to handle assignments such as temperature-controlled cargo, short-haul, or low-priced freight that are sometimes less appealing to independent contractors.
It seems as though market conditions in the trucking industry have gotten a little strange of late. Some haulers seem to be doing well, while others are reporting less demand for trucking. Whatever the case, going with the strong hand is usually not a bad bet, and Landstar is a strong hand.
Not only was business good in the first quarter but also management expressed confidence in the short-term outlook as well. While I couldn't possibly hope to do justice to this company in just one piece (in other words, you must do your own due diligence!), I do believe that Landstar is one of the interesting quality names in the trucking/transportation game.
For more on the big rigs, feel free to check out these other pieces:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
