Here's Why Investors Should Retain Old Dominion (ODFL) Stock
Old Dominion Freight Line’s ODFL efforts to reward its shareholders even in these uncertain times are commendable. However, low revenues, mainly due to freight demand weakness, are worrisome.
Factors Favoring ODFL
Old Dominion’s efforts to reward shareholders through dividends and share buybacks are impressive. During 2019, 2020 and 2021, the company rewarded shareholders to the tune of $295.5 million, $435.1 million and $691.4 million, respectively. In 2022, ODFL paid dividends of $134.48 million and repurchased shares worth $1,277.21 million.
Further, ODFL’s board of directors has raised its quarterly cash dividend by 33.3% to 40 cents per share, effective from the first quarter of 2023. While announcing its second-quarter 2023 results, its board approved a new share repurchase program that authorizes the company to buy back up to $3 billion of its outstanding stock.
Despite the weakness pertaining to freight demand, less-than-truckload or LTL revenue per hundredweight (excluding fuel surcharges) increased 3.6% year over year in the first nine months of 2023. We expect the metric to rise 8.3% in 2023 from 2022's actuals.
Key Risks
Weakness in ODFL's main unit, LTL services represent a huge concern. Segmental revenues declined 8.1% year over year in the first nine months of 2023.
Due to lackluster revenues, operating ratio (operating expenses as a percentage of revenues) in the first nine months of 2023 deteriorated to 72.1% from 70.4% in the first nine months of 2022. A lower value of the metric is preferable.
Due to high costs coupled with weak LTL revenue scenario, management expects fourth-quarter 2023's operating ratio to contract 150 basis points to 200 bps from 70.6% in third-quarter 2023. We expect the metric to be 72.2%, reflecting a sequential dip of 160 basis points.
High capital expenditures in this turbulent phase may also play spoilsport. The truck industry, of which Old Dominion is an integral part, has been persistently battling driver shortage for several years. As old drivers are retiring, trucking companies are finding it difficult to hire new drivers since the job mostly does not appeal to the younger generation.
According to an estimate given by Costello, the United States will face a crisis of 100,000 drivers in five years and a further crunch of 160,000 drivers by 2028. The projection does not bode well for Old Dominion.
Zacks Rank & Stocks to Consider
ODFL currently carries a Zacks Rank #3 (Hold).
Investors interested in the Zacks Transportation sector may consider stocks like Air Canada ACDVF and SkyWest SKYW.
Air Canada currently sports a Zacks Rank #1 (Strong Buy). An uptick in passenger traffic is aiding ACDVF. Recently, management announced plans to launch a new year-round route between Montreal and Madrid. You can see the complete list of today’s Zacks #1 Rank stocks here.
The service will commence in May of the following year as part of its expanded international summer 2024 flying schedule to cater to increased demand. The Zacks Consensus Estimate for current-year earnings has jumped 32.6% in the past 60 days.
SkyWest currently carries a Zacks Rank #2 (Buy). SKYW's fleet-modernization efforts are commendable. Initiatives to reward its shareholders also bode well. The Zacks Consensus Estimate for current-quarter earnings has surged 83.3% in the past 60 days.
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Old Dominion Freight Line, Inc. (ODFL) : Free Stock Analysis Report
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