Old Dominion Freight Line (NASDAQ:ODFL) has been a family run business for decades. Old Dominion was founded in 1934 in Richmond, Virginia by Earl and Lillian Congdon, running a single truck between Richmond and Norfolk. The founding year was fortuitous as the U.S. economy was in the early innings of its slow recovery from the Great Depression. During the first half of the 1940s, in combination new congressional industry regulations, and World War II armament spending, the trucking industry boomed. In the early 1950s, Earl Sr. passed, and his wife Lillian ran the Company with sons Earl, Jr. and Jack. In 1962 Earl, Jr. became President. In 1962 the Company moved to High Point, NC. The Company went public in 1991. In 1998, David Congdon (grandson of Company founders) is named President and Chief Operating Officer. In March 2018, Greg Gantt, a 24-year Company veteran was named President and COO while David Congdon becomes Vice Chairman of the Board and CEO.
In the ensuing decades, organic market expansion was complemented by acquisitions of Bottoms-Fiske Truck Line (1957), Barnes truck Line, Nilsson Motor Express and White Transport (1969), Star Transport (1972), Deaton Trucking (1979) and Carter and Sons Trucking (2001). Since 2006, trucking and transport assets were purchased from Wichita Southeast Kansas Transit, Priority Freight Line, Bullocks Express Transportation, and Bob's Pickup.
In the early 1980’s Congress partially deregulates the motor carriers, granting nationwide operating authority to all applicants. The Company extending their services to Florida, Tennessee, California, Dallas and Chicago, with particular focus on less than truckload shipping.
Trucking companies provide transportation services to virtually every industry operating in the United States and generally offer higher levels of reliability and faster transit times than other surface transportation options. The trucking industry is comprised principally of two types of motor carriers: LTL and truckload.
LTL is used for the transportation of small freight or when freight doesn’t require the use of an entire trailer. This shipping method can be used when freight weighs between 150 and 15,000 pounds. When shipping LTL, the shipper pays for the portion of a standard truck trailer their freight occupies, while other shippers and their shipments fill the remaining space.
LTL freight carriers typically pick up multiple shipments from multiple customers on a single truck. The LTL freight is then routed through a network of service centers where the freight may be transferred to other trucks with similar destinations. LTL motor carriers generally require a more expansive network of local pickup and delivery (P&D) service centers, as well as larger breakbulk, or hub, facilities. E-commerce continues to be a significant tailwind for LTL shippers.
In contrast, truckload carriers generally dedicate an entire truck to one customer from origin to destination. Significant capital is required to create and maintain a network of service centers and a fleet of tractors and trailers. The high fixed costs and capital spending requirements for LTL motor carriers make it difficult for new start-up or small operators to effectively compete with established carriers. In addition, successful LTL motor carriers generally employ, and regularly update, a high level of technology-based systems and processes that provide information to customers and help reduce operating costs.
The main advantage to using an LTL shipper is that shipments can be transported for a fraction of the cost of hiring an entire truck and trailer for an exclusive shipment. In addition, LTL drivers are typically paid on a per-stop basis and generally drive the same route for long periods with the added benefit that better drivers establish rapport with customers. Over the past several years, the growth of the U.S. LTL industry has outstripped the overall U.S. trucking industry and transportation industry, in part due to a secular shift towards shorter supply chains, partially driven by the logistical requirements of a larger, fast growing e-commerce industry. Old Dominion has grown faster than the LTL market, and continues to expand its profitability, relative to competitors, due to their differentiated approach, which we think is sustainable.
According to the Company, more than 97% of the Company’s revenue has historically been derived from transporting LTL shipments for their customers, whose demand for their services is generally tied to industrial production and the overall health of the U.S. domestic economy. The Company is currently the third largest LTL motor carrier in the United States, as measured by 2017 revenue with 10% of the LTL market.
The growth in demand for the Company’s services can be attributed to their ability to consistently provide a superior level of customer service at a fair price, which allows customers to meet their supply chain needs. Integrated structure provides customers with consistently high-quality service from origin to destination, and operating structure and proprietary information systems enable efficient management of operating costs.
As of December 31, 2017, the Company reports that they operate 228 service center locations, of which they owned 194 and leased 34. Their network includes ten major breakbulk facilities located in Rialto, CA; Atlanta, GA; Columbus, OH; Indianapolis, IN; Greensboro, NC; Harrisburg, PA; Memphis and Morristown, TN; Dallas, TX; and Salt Lake City, UT. Service centers are strategically located throughout the country to provide the highest quality service and minimize freight rehandling costs.
Service centers are responsible for the pickup and delivery of freight within their local service areas. Each night, service centers load outbound freight for transport to their other service centers for delivery. All inbound freight received by the service center in the evening or during the night is generally scheduled for local delivery the next business day, unless a customer requests a different delivery schedule.
According to the Company, as of December 31, 2017, the Company owned 8,316 tractors. They generally use new tractors in linehaul operations (movement of cargo between two major cities or ports, especially those more than 1,000 miles apart) for approximately three to five years and then transfer those tractors to P&D operations for the remainder of their useful lives. In many service centers, tractors perform P&D functions during the day and linehaul functions at night to maximize tractor utilization. The Company employed 19,183 individuals full-time, none of whom were represented under a collective bargaining agreement. Full-time employees work in the following roles: Drivers 10,187, Platform 3,443, Fleet technicians 557, Sales, administrative and other 4,996. Total: 19,183. The Company employed 5,311 linehaul drivers and 4,876 P&D drivers full-time. They select drivers primarily based on safe driving records and experience.
Since 1988, the Company has provided the opportunity for qualified employees to become drivers through the “Old Dominion Driver Training Program.” There are currently 2,892 active drivers who have successfully completed this training, which was approximately 28.4% of the driver workforce as of December 31, 2017. Their driver training and qualification programs have been important factors in improving their safety record and retaining qualified drivers.
Annual turnover rate for driver graduates is approximately 5.9%, which is below the Company-wide turnover rate for all drivers of approximately 8.0%. Drivers who maintain safe driving records receive annual bonuses of up to $3,000 per driver.
Revenue is generated primarily from customers throughout the United States and other parts of North America with 60% industrial and 25% retail and 15% residential. In 2017, the largest customer accounted for approximately 3.7% of revenue and the largest 5, 10 and 20 customers accounted for 11.2%, 17.0%, and 23.6% of revenue, respectively. For each of the previous three years, more than 95% of revenue was derived from services performed in the United States and less than 5% of revenue was generated from services performed internationally.
The Company’s long-held strategy is to grow capacity and build terminal density to ultimately get closer to their customers. Old Dominion’s competitive advantage is their industry-leading LTL hub and spoke network capacity, which insures 99% on-time delivery on 1 and 2-day deliveries. Proof of their competitive advantage is their consistent +600 bps operating margin advantage relative to their competitors.
Annual network capex expenditures are also a Company competitive advantage to ensure industry-leading customer satisfaction. In 2018 capex should reach $555 million - $310 for tractors and trailers and $200 million in real estate and service center expansion. 2017 capex was $382 million. The Company opened 10 and 22 new service centers over the past five and ten years, respectively, for a total of 228 service centers as of December 31, 2017.
Several of Old Dominion's larger competitors have shrunk their service terminal networks or outsourced shipping capacity to third parties during the past decade, meanwhile Old Dominion has continued to expand its network of service centers, and owned-and-operated linehaul and P&D tractors. As a result of Old Dominion's consistent, long-term strategy to reinvest in capacity, the Company has substantially less reliance on purchased (third party contracted) transportation capacity, just as the trucking industry finds itself staring down a long road of labor shortages. Historically, Old Dominion has had a low single-digit percent of revenues serviced by third party capacity, and a few years ago moved even further away from this reliance. A limited reliance on purchased transportation allows management to focus on maximizing the profitability of Old Dominion's existing capacity, while prudently reinvesting in incremental capacity. We think the Company's focus of driving returns on owned-capacity is a superior long-term strategy, compared to chasing market share, especially against the backdrop of a domestic trucking industry facing chronic capacity shortages.
We expect Old Dominion revenues to continue benefitting from the long-term shift towards LTL mode of shipping. Despite continued reinvestment in capacity to meet demand, we expect industry leading operating ratios to continue, and help drive an attractive long-term, double-digit growth profile for the Company.
Earnings per share in 2017 were $5.63. 2018 and 2019 earnings expectations are $6.45 and $7.25, respectively.
From David Rolfe (Trades, Portfolio)'s Wedgewood Partners 3rd quarter 2018 shareholder commentary.
