Old Dominion Freight: A High-Quality Freight Company

Old Dominion Freight Line (ODFL) is a “less than truckload” (LTL) freight carrier in the U.S. and internationally.

We are neutral on the stock. According to its company bio, ODFL provides regional, inter-regional, and national LTL services, including expedited transportation.

The term “less than truckload” describes shipping services for relatively small freight loads. The loads range between 150 and 15,000 pounds; some sources site 5,000 pounds as the upper threshold, but you get the idea. Small shipments like these often can’t fill an entire truck, allowing space to combine other small shipments as well.

Old Dominion Freight’s Big Competitive Advantage

ODFL operates in a highly competitive industry. Despite this, its size and efficiency give it a major competitive advantage, which we will show in the numbers below.

There are a few ways to figure out if a company has a competitive advantage using only its income statement. The first method involves calculating the earnings power value (EPV).

Earnings power value is measured as adjusted EBIT after tax, divided by the weighted average cost of capital, and reproduction value can be measured using total asset value. If earnings power value is higher than reproduction value, then a company is considered to have a competitive advantage.

For ODFL stock, the calculation is as follows:

EPV = EPV adjusted earnings / WACC

$11.56 billion = $809.5 million / 0.07

It is important to note that EPV adjusted earnings are adjusted for a no-growth environment. Essentially, it’s an estimate of profitability if the company chose to stop reinvesting in growth.

Since Old Dominion Freight has a total asset value of $4.8 billion, we can say that it indeed does have a competitive advantage. In other words, assuming no growth for ODFL, it would require $4.8 billion of assets to generate $11.56 billion in value over time.

Another method of determining a competitive advantage is by looking at a company’s gross margins because it represents the premium that consumers are willing to pay over the cost of a product or service.

An expanding gross margin indicates that a sustainable competitive advantage is present. If a company has no edge, new entrants would gradually take away market share, leading to decreasing gross margins as pricing wars ensue to remain competitive.

ODFL’s gross margins have increased consistently in the past decade; it is quite remarkable. Since 2012, ODFL’s gross margins have increased every single year, starting from 26.3% in 2012 to 38.1% in 2021. As a result, its gross margins indicate that a competitive advantage is very present here as well.

Besides this, the company has been increasing its market share steadily as well. For example, its largest location by revenue, the Midwest U.S, saw its market share steadily rise from 5.6% in 2010 to 12% in 2021.

All its other U.S. geographical segments saw similar steady increases in market share as well. You don’t just easily increase your market share while expanding profit margins if you don’t have a competitive advantage. 

High Returns on Capital

ODFL has stellar returns on capital for its line of business. Its return on equity (ROE) for 2021 came in at 29.5%, and in the past five years, its ROE averaged 23.8%. The most impressive part is that it has expanded its ROE (it was 18% in 2012) over the years while lowering its debt levels. 

Its debt/equity ratio was 23.4% was in 2012, while its debt/equity ratio is now 2.7%. This shows that ODFL is efficient enough not to need to take on extra debt to boost its returns.

Overall, its high returns on capital are much greater than its weighted average cost of capital of 7%, indicating that the company is creating value for shareholders.

Earnings Estimates and Valuation

Currently, ODFL’s P/E ratio is 31.8 For 2022 and 2023, EPS is expected to grow by 21.9% and 10.6%, respectively.

This brings the forward 2022 and 2023 P/E ratios down to 26.1 and 23.6, respectively. These numbers aren’t astronomically high by any means, but they aren’t cheap either. For the high-quality nature of this company, this is likely a fair multiple.

Wall Street’s Take

Turning to Wall Street, ODFL stock has a Hold consensus rating based on three Buys, 11 Holds, and one Sell rating assigned in the past three months. The average Old Dominion Freight Line price target of $352.07 implies 19% upside potential.

Conclusion

Old Dominion Freight Line is a high-quality company with a competitive moat. The company has seen its market share and margins grow over the years. For these reasons, its EPS has grown substantially, and is still expected to grow at respectable growth rates.

Nonetheless, we are neutral on the stock due to its valuation likely being closer to fair value than undervalued, and because its stock is currently in a downtrend.

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