Landstar Systems Inc. (LSTR) is a leading North American third-party logistics provider. Founded in 1991, the firm has focused its business on over-the-road truck transportation. Consequently, it has developed the second largest active-capacity network in the industry, following C.H. Robinson Worldwide Inc. (CHRW). Apart from its core business, the firm provides intermodal transportation, and warehousing. It also offers air and ocean freight forwarding services, as well as insurance programs to capture owner-operators.
A Profitable Business Model
Landstar is one of the largest truck brokers in the U.S., with truck transportation accounting for 92% of its total revenue. The firm does not own tractors but only a fleet of trailers. Instead, it has developed a vast network of shippers, carriers and independent sales agents. Its asset-light business model has a variable-cost structure and low capital intensity, which has enabled the company to boast average returns on capital of almost 30% over the past decade.
Landstar’s trucking capacity is exceptional because it is built both on captive owner-operators as well as on third-party broker carriers. Business capacity owners, who cover their own operating expenses, receive a fixed percentage of revenue per shipment and also benefit from discounts on equipment fuel and tires. Furthermore, they are able to choose their own loads. In return, they haul exclusively for the company, generating almost half of its total revenue. As for carriers, Landstar acts as a compelling market maker since, by entering its network, they can reduce empty miles thus empowering their sales efforts.
A Sturdy Value Proposition
An immense network of shippers and carriers affords Landstar a compelling value proposition that supports the company’s wide economic moat. It boasts a customer base of 26,000 shippers which has garnered the firm great buying power. Thus, it can offer better capacity at lower rates, providing its customers with material cost savings. Shippers also benefit from outsourcing carrier management and transforming fixed transportation costs into variable costs.
On the other hand, its network of 8,300 captive owner-operators and 28,000 broker carriers represents a vast source of capacity for shippers, as well as a competitive advantage that has become stronger given a tightening trucking-industry capacity. Additionally, Landstar specializes in irregular routes and odd-size freights (with flatbed business representing 35% of its sales), which also act as competitive differentiators.
Further advantages stem from the firm’s proprietary IT platforms. With supply chains becoming increasingly complex, there is a growing demand for greater informational expertise, which enables the firm to capture market share from smaller 3PL providers. Moreover, switching costs may arise for customers in the event of the company’s IT systems integrating with theirs.
A Solid Stock
Landstar’s stock trades at 24.4 its trailing earnings compared to the industry average of 36.8. And, its earnings per share showcase an outstanding growth of 26.5% compared to its peers’ 8.50% average. In fact, management expects this upward trend to continue, delivering EPS of $0.56 to $0.61 in the first quarter, supported by revenues in a range of $640 million to $690 million.
The stock is also attractive considering its return on equity, which boasts an impressive 34.20% against the lean industry average of 6%. Furthermore, dividend growth rate for the last three years reached 10.60% compared to -1.80% for its industry peers. Investment guru Joel Greenblatt (Trades, Portfolio) recently increased his holdings in the company by 49.79% following my bullish feeling about Landstar’s solid growth potential.
Disclosure: Vanina Egea holds no position in any stocks mentioned.