Ahhh ... trucking. This is one of the seemingly stranger industries today; the state of the market depends entirely upon whom you ask. For those doing well, like Old Dominion (NASDAQ:ODFL), the market looks just fine. For those doing less well, like J.B. Hunt (NASDAQ:JBHT), the market appears to be softening.
And then there's Arkansas Best (NASDAQ:ABFS). One of the largest and best-run less-than-truckload (LTL) carriers, second-quarter results suggest that its business is somewhere in the vicinity of lukewarm.
Revenue grew 8% in the quarter as the company traded off a slight decrease in tonnage and shipments for an increase in revenue per ton. Efficiency continued to improve and the operating ratio moved from 91.6% to 90.9% (operating ratio is essentially one minus the operating margin). As a result, the company posted 21% growth in net income and met mean analyst expectations.
Judging by what we've seen from other carriers, I would speculate that Arkansas Best is making a choice between growth in tonnage and growth in profits. In other words, I think it is choosing to lose some business rather than sacrifice profitability. While that might frustrate some investors in the short term, I believe it could be a wise strategic move over time. Arkansas Best has a very competitive cost structure, which it works hard to improve. And if other carriers want to price themselves into bankruptcy, then that will simply mean more demand and less competitive capacity for Arkansas Best in the long run.
At present, Arkansas Best is one of the cheapest stocks in the trucking sector. Even if the company is choosing to forgo some less profitable business, I'm not sure that sort of relative valuation is appropriate. That said, there's nothing to say that the valuation can't get even worse -- it wasn't that long ago that these shares traded at a single-digit multiples to earnings.
Overanalyzing the trucking sector today would seem to be a path toward grey hair and a padded jacket with extra-long sleeves. On one hand, there seems to be plenty of cargo to ship, but on the other hand many economists are now whispering about the possibility of an economic slowdown. On one hand, trucking executives say that competitors aren't irresponsibly adding capacity like they have in the past, but on the other hand many truck builders are reporting very good business.
The bottom line for me is that Arkansas Best is a good trucking company built to survive and thrive over the years to come. Do I think the present valuation is reasonable relative to future growth prospects? Yes, I do. So are the shares a great buy today? Well, that's for each Fool to decide for him or herself.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
