Old Dominion Freight Line Ramps up a $3 Billion Share Repurchase – Buyback Wednesdays

Key Insights:

• Old Dominion Freight Line, Inc. (ODFL) is a prominent American less-than-truckload (LTL) shipping company operating at regional, inter-regional, and national levels
• The company boasts a history of substantial revenue growth and strong profitability, reflecting its sound business strategies.
• The recent shut down of operations at Yellow Corporation (YELL) should provide a short-term catalyst for other trucking companies like Old Dominion.
• The company has been steadily buying back stock, retiring more than 9% of shares outstanding over the last four years.
• The new $3 billion buyback program follows a $2 billion buyback that was recently completed.

In addition to its core LTL services, Old Dominion Freight Line, Inc. (ODFL) offers expedited, logistics and household moving services. With a market capitalization of approximately $46 billion, the company operates a fleet of over 5,800 tractors and more than 22,500 trailers. Established in 1934, Old Dominion currently runs 256 service center locations across 48 states strategically positioned to ensure top-notch service quality and minimize freight rehandling costs. The company’s commitment to on-time service is noteworthy, with a substantial improvement from 94% in 2002 to an exceptional 99% in 2022. The name “Old Dominion” refers to a common nickname for the Commonwealth of Virginia, where the company’s first center of operation was located.

Recently, on July 26, 2023, Old Dominion announced that its Board of Directors has approved a share buyback program. The company is authorized to repurchase up to $3 billion worth of outstanding shares through open market purchases, allowing for the reacquisition of up to 6.5% of its stock. This buyback program follows the completion of its existing $2 billion repurchase program, which was announced in July 2021. As of March 31, 2023, the company still had $537.4 million remaining under the authorized amount from the 2021 repurchase program.

Source: Old Dominion – Investor Presentation

Market Expansion:

Over the last decade, the company broadened its footprint over the US and has benefited by gaining market share in each region it operates in. Beginning in 2013, the company has made strategic investments amounting to $2 billion in service center additions and expansions, leading to the establishment of 38 new service centers, representing a remarkable 17% increase, and a notable 49% rise in door count. Throughout this journey, Old Dominion has consistently outperformed the market over extended periods of time.

Being optimistic about the company’s expansion, President and Chief Executive Officer, Mr. Marty Freeman, commented,

“We believe that our ability to consistently offer network capacity differentiates us from the others in our industry, which is an additional element of our value proposition that we believe will support our long-term market share initiatives.”

Growth:

Old Dominion has demonstrated impressive revenue growth, achieving a compounded rate of 10.4% over the past decade. From $2.34 billion in December 2013, the company’s revenue has increased to $5.95 billion in December 2022. While it is expected that the estimated forward revenue growth of 6.75% may not match this historic performance, Old Dominion is still projected to outperform the market.

Source: Old Dominion – Investor Presentation

Throughout its history, Old Dominion has shown resilience, with only three years of negative EPS growth since 2003, all of which occurred during the challenging 2007-2009 recession.

An important aspect of Old Dominion’s growth strategy is its emphasis on organic growth. The company has not relied on acquiring competitors to drive expansion, and instead, it prioritizes strategic investments to support the long-term profitable growth of its business. Considering the trucking industry is highly fragmented, it is interesting to see that Old Dominion prefers to grow through organic initiatives instead of attempting to roll-up the industry. We have seen a large number of roll-ups end up with a lot of debt and fall apart before the expected synergies or benefits of scale are realized.

Strong and Experienced Management Team:

Old Dominion has an experienced management team with members serving more than two decades in the company and a ton of experience in the transportation field.

• David S. Congdon, appointed as Executive Chairman of the Board in May 2018, has been an integral part of Old Dominion for more than 40 years, including 25 years as an executive officer. His instrumental role in the company’s growth through geographic expansion and strategic acquisitions has been crucial in sustaining profitability and significant growth in shareholder value. Mr. Congdon’s extensive experience and deep understanding of the less-than-truckload (LTL) industry have been instrumental in Old Dominion’s continued success.
• Kevin “Marty” Freeman was appointed President and Chief Executive Officer effective July 1, 2023, after serving as the Executive Vice President and Chief Operating Officer since May 2018. Mr. Freeman has 43 years of experience in the transportation industry and has held various positions in operations and sales with Old Dominion since joining the company in February 1992.
• Gregory B. Plemmons was appointed Executive Vice President and Chief Operating Officer effective July 1, 2023, after serving as the Senior Vice President – Sales since January 2019. He has 34 years of experience in the transportation industry and has served Old Dominion in various other positions in operations and sales since joining the company in April 1997.
• Adam N. Satterfield was appointed Executive Vice President – Finance, Chief Financial Officer and Assistant Secretary effective July 1, 2023, after serving as the Senior Vice President – Finance, Chief Financial Officer and Assistant Secretary since January 2016. Before joining the company in 2004, Mr. Satterfield was an Audit Manager with KPMG LLP, a global accounting firm.

The experience and dedication of the management team have played a vital role in Old Dominion’s success and positioned the company as a leading player in the transportation industry.

Current Scenario – Logistics Managers Index:

The Logistics Managers Survey is a monthly study aimed at revealing the status of US logistics activity. The Logistics Manager’s Index (LMI) score is a combination of eight unique components that make up the logistics industry. The components include: inventory levels, inventory costs, warehousing capacity, warehousing utilization, warehousing prices, overall transportation capacity, transportation capacity utilization and transportation prices. The LMI is calculated using a diffusion index, in which any reading above 50 percent indicates that logistics is expanding; a reading below 50 percent is indicative of a shrinking logistics industry.

Unfortunately, the LMI experienced a sixth consecutive monthly decline, reaching a record low of 45.4 in July 2023, signaling another contraction in the logistics sector, primarily driven by a decline in inventories. Inventory levels have been steadily decreasing, with a reading of 42.9, the second-lowest ever recorded. Additionally, the growth in inventory costs also showed a decline at a reading of 57.1. Furthermore, transportation utilization and transportation prices are contracting, although at reduced rates, with readings of 46.8 and 32.8, respectively. Despite the current downturn, survey respondents remain optimistic about the future, predicting an expansion rate of 55.4 over the next 12 months, reflecting the strength we are seeing in the economy from Q1 and Q2 2023 GDP numbers.

Old Dominion Vs Peers:

The company shared a comparison between its expansion over the last decade to some of its public competitors like FedEx (FDX), Yellow Corporation (YELL), and XPO Inc. (XPO). The results revealed a stark contrast, as competitors experienced a decline in their service center count by 8%, while Old Dominion achieved growth with a 17% increase in its service center count during the same period. This notable disparity showcases Old Dominion’s commitment to expanding its network and enhancing its capabilities, setting it apart from its competitors in the logistics industry.

Source: Old Dominion – Investor Presentation

Old Dominion is by far the largest company among all its peers based on enterprise value. When it comes to profitability, the company clearly takes the lead, demonstrating impressive gross and net margins, as well as a notable return on equity. In all financial metrics, Old Dominion outperforms its competitors, making a clean sweep across the board. What’s particularly surprising is that despite its size and success, Old Dominion remains the least leveraged company among its peers, with net debt of just $24.83 million and a low Total Debt to Equity ratio of 2.09%.

Source: SeekingAlpha

Valuation & Balance Sheet:

Old Dominion is currently trading at an EV/EBITDA of 23.09, reflecting the premium investors are willing to pay for the company’s operational excellence.

Source: SeekingAlpha

With a forward EV/EBITDA of 24.12 the company appears to be reasonably valued if it can continue growing its top and bottom lines without taking on too much debt.

Dividends:

Over the last five years, Old Dominion Freight Line has grown its dividend at an annualized rate of 35.5%. Despite this increase, the dividend yield is a paltry 0.38% because the 329% increase in stock price over the last five years has far outpaced the increase in dividends. The company’s low payout ratio of 12.22% indicates that the company prioritizes using buybacks to return capital to shareholders instead of dividends.

Old Dominion pays quarterly dividends and has been increasing them for seven consecutive years. While the company remains focused on returning excess capital to its shareholders, it has emphasized that its primary priority for capital spending will be strategic investments in capital expenditures that support the long-term profitable growth of its business.

Q2 2023 Results:

Despite being a strong player in the market, Old Dominion’s recent earnings indicate a weakening in demand. During the second quarter, the company managed to maintain its market share in an environment of subdued freight demand.

• Second-quarter revenue was $1.41 billion, slightly below analyst estimates of $1.44 billion, and reflecting a 15.2% decrease compared to the same period last year.
• Earnings per share (EPS) for the quarter was $2.65, surpassing the consensus estimate of $2.63 by two cents but well below the $3.30 recorded in Q2 2022.
• Net margin improved to 21.49% from 20.77% in the corresponding prior-year quarter.
• Cash flow from operations during the second quarter and first half of 2023 amounted to $287.8 million and $703.2 million, respectively, while capital expenditures for the same periods were $244.7 million and $479.4 million.

Source: Old Dominion – Investor Presentation

Old Dominion continued to return capital to shareholders during the second quarter through its share repurchase and dividend programs. For the first six months of this year, the cash utilized for shareholder return programs included $302.2 million of share repurchases and $87.8 million of cash dividends. The company had $55.1 million in cash and cash equivalents on June 30, 2023.

Bottom Line:

Despite industry headwinds, Old Dominion has gained market share and demonstrated strong execution, with a healthy balance sheet, disciplined capital allocation and strong profitability.

While there is potential for long-term growth, caution is warranted due to the prevailing weakening demand. With a forward P/E of 38.9 and forward EV/EBITDA of 24.12, the stock is trading very close to its 10-year high of $427.59 on July 27, 2023.

This is a company I would love to follow very closely and plan to add it to my watchlist in case a buying opportunity presents itself in the future.

Welcome to edition 70 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

As Q2 earnings announcements have commenced, there has been a noticeable increase in buyback activity. Last week saw twenty five companies announcing their buyback plans, a significant surge compared to the previous week.

Top 5 Stock Buyback Announcements 

1. CNX Resources Corporation (CNX): $20.49

On July 25, 2023, the Board of Directors of this natural gas and midstream company authorised an additional $1 billion share repurchase program, equal to around 33.8% of its market cap at announcement.

2. TriNet Group, Inc. (TNET): $104.61

On July 26, 2023, the Board of Directors of this human resources (HR) solutions provider approved an additional $1 billion share repurchase program, equal to around 17.5% of its market cap at announcement.

3. Genworth Financial, Inc. (GNW): $5.99

 On July 31, 2023, the Board of Directors of this insurance company authorized an additional $350 million share repurchase program, equal to around 12.5% of its market cap at announcement.

4. Apartment Income REIT Corp.  (AIRC): $34.4

 On July 31, 2023, the Board of Directors of this REIT authorized a new $500 million share repurchase program, equal to around 10% of its market cap at announcement.

5. Ameriprise Financial, Inc. (AMP): $349.01

 On July 26, 2023, the Board of Directors of this bank authorized a new $3.5 billion share repurchase program, equal to around 9.5% of its market cap at announcement.

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