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Broadening Coverage of the Trucking Industry
Truck transportation is certainly among the most cyclical of all industries; indeed, it is a leading indicator of economic activity. The segment continues to have its challenges, but, following the recent long recession, the freight market is on the mend, with rising volumes and rates. The Value Line Investment Survey has selected trucking two companies, Knight Transportation (KNX) and Old Dominion Freight Lines (ODFL) to add to its coverage. Though very different, both seem well positioned to capitalize on the road to recovery.
Both of these trucking players were born from humble, family-owned stock. Both also went public in the first half of the 1990s, and never looked into the rear-view mirror. But the similarities pretty much end there.
Knight Transportation is a truckload carrier. The truckload business involves the movement of full trailers of goods for a single customer from origin to destination without handling. Knight delivers coast-to-coast with a large fleet of company-owned tractors and trailers and access to the capacity of countless third-party and customer equipment providers. Services include dry van and temperature-controlled haulage. Though operations are nationwide in scope, Knight is headquartered in Phoenix, Arizona and has a large percentage of business in the western part of this country.
The company’s growth rate has exceeded that of the truckload industry over the past ten years, and it has some of the best operating margins in the group, often greater than eight percentage points above the average. To be fair, some of its biggest competitors have a large component of auxiliary businesses, such as logistics services, that inherently carry lower profit margins, whereas Knight, until recently, was more of a pure-play truckload provider. However, Knight is now aggressively expanding into asset-light services, including port handling, truck brokerage, and intermodal transportation, where loads are delivered by a combination of truck and rail. Though intermodal does involve a lot of capital investment in equipment, Knight’s rail partners are providing tens of thousands of containers to the effort, which will keep investment low. These services may have weaker operating margins, but the return on investment is much higher due to the relatively small initial spending requirement. In addition, these complementary businesses may be able to point customers in Truckload’s direction.
Knight has a stellar balance sheet, with no long-term debt and ample cash on hand. It returns excess cash to shareholders through stock repurchases and dividends, including special cash dividends on occasion.
Old Dominion Freight Lines, on the other hand, is a less-than-truckload (LTL) carrier. In this business, light loads (generally between 1,000 and 10,000 pounds) are collected from multiple customers, then consolidated in one of several warehouses and reloaded onto trucks heading in a certain general direction. A hub-and-spoke design is a common configuration. As one can imagine, sophisticated computer software is utilized to plan the optimal routing. From a single truck running between Richmond and Norfolk, Virginia, ODFL has grown into the seventh largest LTL carrier in the United States. And through marketing and carrier relationships, it provides door-to-door transportation services throughout all of North America, Central America, South America, and the Far East. The company also offers a broad range of logistics services, including ground and air expedited shipping, transportation management, supply-chain consulting, truckload brokerage, and warehousing.
This is the only publicly traded LTL carrier that didn’t suffer a single bottom-line loss in any quarter during the 2007-2009 economic recession. That feat was truly astounding as the company continued to expand rapidly and did not ask for, nor receive, employee wage and benefit concessions over the freight slump as many of its retreating competitors did. ODFL is a nonunionized trucker, but it has solid employee relationships, likely boosted by good job security. This trucker maintained pricing discipline during the downturn, while others offered discounts in an attempt to hold onto market share. Top-notch customer service gives ODFL the upper hand in contract negotiations. ODFL, in fact, added capacity, putting it in a good position for the current freight demand rebound.
ODFL cut back on capital spending in 2010, but we expect outlays to nearly triple this year, as it continues its quest to be the number one LTL carrier in the nation. Although the balance sheet is in fine shape, ODFL completed a note offering and issued additional common stock to fund capital spending plans for this year and keep debt leverage in line at the same time.
Readers can find our initial reports on each of these companies, including a sixteen-year financial history and estimates for the next two years and out to 2014-2016, in the June 3rd Issue of The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.