In a year’s time, shares of Old Dominion Freight Line, Inc. ODFL have surged 54.4% compared with the industry’s rise of 19.1%
Reasons for Robust Price Performance
In July, this Thomasville, NC-based company posted better-than-expected earnings and revenues in second-quarter 2018 results. Earnings per share (EPS) of $1.99 outpaced the Zacks Consensus Estimate of $1.82 and improved 67.2% year over year. Quarterly revenues of $1033.5 million surpassed the consensus estimate of $1024.6 million, courtesy of less-than-truckload’s (LTL) impressive segmental performance. During the quarter, LTL revenue per hundredweight increased 4.1%, excluding fuel surcharges. While LTL shipments increased 11.2%, LTL weight per shipment improved 3.1%. In fact, the company expects LTL segment to perform well in the third quarter as well, which will drive growth at Old Dominion. Also, operating ratio improved 200 basis points (bps) to 78.7%.
Moreover, the tax reform policy (Tax Cuts and Jobs Act) is a boon for U.S.-based transportation companies like Old Dominion. The significant reduction in corporate tax rate will boost cash flow, thereby driving bottom-line growth. In the second quarter, effective tax rate declined to 26.2% from 38.6% a year ago. For the third quarter, the same is anticipated to be around 26.2%.
Furthermore, we are also impressed by Old Dominion’s efforts to reward shareholders in the form of dividends and share buybacks. In February 2018, the board of directors approved a 30% hike in quarterly cash dividend to 13 cents (or 52 cents annually). During the second quarter, the company returned $68.8 million to shareholders in the form of dividends and share repurchases. In May, the company’s board also cleared a new buyback program which has commenced on May 23, 2018 and will run through June 2020. Under this new program, Old Dominion can repurchase up to 250 million shares.
Additionally, trucking companies like Old Dominion is likely to benefit from improvement in domestic economy. Truck transport is a ‘derived demand’ industry, which implies that requirements for truckers depend on the demand for the products that trucks haul. According to the American Trucking Associations’ (“ATA”) U.S. Freight Transportation Forecast, the trucking industry will continue to gain momentum in the coming years. ATA further anticipates 20.73 billion tons of freight to be transported by all modes in 2028, representing a significant increase from 15.18 billion tons in 2017.
Bullish Readings & Zacks Rank
Old Dominion has an impressive surprise history. It beat earnings estimates in each of the trailing four quarters, the average being 5.1%.
The optimism revolving around the stock can be gauged from the Zacks Consensus Estimate being revised 10.2% upward in the last 60 days for current-quarter earnings.
The company’s impressive Growth Score of B further highlights its attractiveness.
In light of these positives, we believe that Old Dominion should be added by investors to their portfolios for handsome returns. The Zacks Rank #2 (Buy) carried by the stock seems to suggest the same.
Other Stocks to Consider
A few other top-ranked stocks in the broader Transportation Sector are C.H. Robinson Worldwide, Inc CHRW, Norfolk Southern Corporation NSC and SkyWest, Inc SKYW. While C.H. Robinson and Norfolk Southern carry a Zacks Rank #2, SkyWest sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Shares of C.H. Robinson, Norfolk Southern and SkyWest have gained 6.8%, 23.6% and 16.1% in the past six months, respectively.
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