It’s a corporation with a great deal of eco-friendly unfold all-around its fiscal strength and profitability tables. But the valuation ratio is in the dumps. What is a worth trader to believe?
The corporation is Previous Dominion Freight Traces Inc. (NASDAQ:ODFL), just one of the greatest trucking companies in the United States. Extra specially, it is a much less-than-truckload carrier, hauling for prospects that never have hundreds major enough to fill a freight-truck trailer.
As these types of, it competes with companies these types of as FedEx Freight (NYSE:FDX) and UPS Freight (NYSE:UPS). Previous Dominion has claimed it is the third-most significant carrier in the country by revenue, but doesn’t specify which companies it trails. My research indicates the two bigger competitors are FedEx Freight and YRC Around the globe (NASDAQ:YRCW). There are also 1000’s of scaled-down competitors, specially in local and regional marketplaces.
As an LTL corporation, it has large fastened expenditures, not only for trucks but also for the authentic estate and service centers it requires.
To cope with these types of fastened expenditures, a corporation requires just one or more of these a few elements: powerful earnings, powerful cash move or a heavy credit card debt load. The fiscal strength desk higher than implies Previous Dominion does not have a great deal of a credit card debt load.
This chart exhibits how the remaining two elements, earnings for each share and functioning cash move for each share, had developed in the ten decades prior to the conclude of 2019:
Now, distinction that with the ten-year very long-time period credit card debt and capital lease obligations chart (there are no capital lease obligations, so the chart refers to only very long-time period credit card debt):
What we are looking at is a corporation that has taken an ax to its credit card debt load, though escalating its earnings and functioning cash move. Given that the 2010s have been a 10 years of low curiosity premiums, Previous Dominion has resisted the entice of leverage and cleaned up its balance sheet.
That’s the kind of management worth buyers like to see, but will the corporation hold up to further scrutiny?
Because Previous Dominion is a Buffett-Munger Screener stock, we can examine it employing the 4 requirements necessary to get to Buffett-Munger status: predictability of revenue and earnings development, a competitive advantage, small or no credit card debt and a PEG/PEPG ratio displaying the stock is undervalued.
Previous Dominion receives a 4 out of 5-star ranking for predictability. This chart exhibits revenue for each share and earnings for each share for the ten decades ending Dec. 31, 2019:
Can it go on to improve in the intensively competitive trucking market? It need to be capable to as it observed in its Could trader presentation, it is investing important sums back again into its business:
1 measure of competitive advantage is located in the margins a corporation with regular and important margins can retain or even improve its prices. As this chart exhibits, Previous Dominion has developed its functioning and net margins:
For a different point of view, we can look at a trucking market metric, LTL revenue for each shipment, from the trader presentation:
This slide exhibits its very long-time period credit card debt (eco-friendly bars) in relation to the company’s return on invested capital (ROIC):
At the conclude of 2019, Previous Dominion had zero shorter-time period credit card debt and just $45 million in very long-time period credit card debt.
So much, the fundamentals have been attractive, quite attractive in some scenarios. Even so, that changes when we turn to valuation:
- The PEG ratio, which is the crucial for Buffett-Munger shares, is 1.ninety eight%, properly higher than the undervalued and reasonably valued ranges. The ratio is calculated by dividing the price tag-earnings ratio (thirty.86) by its 5-year Ebitda development fee (15.sixty%).
- The price tag-earnings ratio routinely swings up and down due to the fact the trucking market demonstrates the ups and downs of the American financial system. Currently, Previous Dominion is at a large place:
- Eventually, the discounted cash move calculator exhibits it to have a unfavorable margin of security of eight.four%.
10 of the investing gurus adopted by GuruFocus have positions in this stock. Largest amongst them is PRIMECAP Expense with just beneath 302,000 shares, after expanding its stake by 13.54% in the to start with quarter.
Jerome Dodson (Trades, Portfolio) of the Parnassus Fund has the second-highest accumulation, holding 148,537 shares, though Pioneer Investments (Trades, Portfolio) is third with fifty five,307 shares after unloading sixteen.eighty three% of its holding in the to start with quarter.
Given its comparatively large predictability for development, its competitive advantage and its low amount of credit card debt, Previous Dominion Freight Traces would be an superb concentrate on for a lot of buyers.
But the latest price tag is rich and overvalued by all the metrics we reviewed. And maybe which is not astonishing, supplied the total of development we are obtaining. And this a properly-managed corporation that has mapped out a foreseeable future with more development and would be really hard to dismiss.
As the chart of Previous Dominion’s price tag-earnings ratio implies, this is a cyclical corporation and is possible to present a greater entry place in the next couple decades.
Disclosure: I do not possess shares in any companies named in this write-up and do not anticipate to obtain any in the next seventy two hours.
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About the creator:
Robert F. Abbott has been investing his family’s accounts due to the fact 1995 and in 2010 included solutions — predominantly covered calls and collars with very long shares.
He is a freelance author, and his projects include things like a web site that provides info for new and intermediate-amount mutual fund buyers (whatisamutualfund.com).
As a author and publisher, Abbott also explores how the middle course has appear to possess major business via pension resources and mutual resources, what management expert Peter Drucker called the “unseen revolution.”
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