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Investment Thesis
Thanks to recent growth in revenue and EPS, Old Dominion Freight Line (ODFL) share prices have justifiably moved higher. However, the speed at which share prices moved to the upside led to an understandable correction. Following a fall from all-time high share prices, Old Dominion Freight Line is poised for additional growth amid its ability to expand with supply chain constraints.
Old Dominion Freight Line Background:
Founded in 1934, Old Dominion Freight Line has shown impressive growth in most facets of its business amid the increased need to stock shelves across the country. They offer LTL (Less-Than-Truckload) services wherein domestic inventories can be continuously maximized based on the manufacturing output of suppliers. While slightly more expensive, their services enable companies to maintain dependable inventories, something that will make the business model of Old Dominion Freight Line more desirable given the current dire supply chain.
Despite heightened demand for their LTL services, share prices have fallen substantially from their ATHs. It continues to trade well under $300, something shares have only seen prior to September of 2021. Since then, management has touted several made improvements and remains optimistic in their ability to withstand and grow from further needs of their services.
Continued Growth is No-Brainer
Old Dominion Freight Line has already shown itself capable of great growth and with an effective management team, looks to continue this trend. In late October, Old Dominion Freight Line reported third-quarter earnings, which beat estimates in Revenue and EPS, representing a near 25% growth YoY for both figures. No doubt, for a business that has been specializing in the freight industry for 88 years, such a growth rate is phenomenal and a true testament to their management’s ability to operate amid changing economic times (especially a pandemic). Speaking on the latter, it seems as though management has great incentives to drive results as their ownership figures dwarf that of competitors such as FedEx (FDX) and United Parcel Service (UPS), who, respectively, have insider ownership of 8.2% and <1%. Accordingly, this large stake for management gives investors peace of mind when they offer guidance to upcoming results.
Given ultra-optimistic sentiment from management after numerous improvements to their operations, Old Dominion Freight Line should have no issue recovering from its most recent slump and moving forward to new highs in valuation. Beginning with their generous market share and favorable view of supply-chain constraints, Old Dominion Freight Line’s growth story is still in the making. As of September, estimates stated they held more than an 11% market share in all regions of the continental U.S. With this clearly extensive reach, Old Dominion Freight Line is at an especial advantage when the inventory needs of more businesses require further frequent deliveries. Alone, into Q3 of 2021, Old Dominion Freight Line witnessed a nearly 14% increase in tons transported through means of LTL and it appears as though their management, such as CEO Greg Gannt, who has been with the company since 1994, is confident that supply chain constraints are an opportunity to advance their market share even further,
[W]e believe we are in a better position than any other carrier to win additional market share and further increase shareholder value over the long term” (Q3 Earning’s Call Transcript).
To assist in the process of increasing market share amid the greater need to ship on a more frequent basis, as LTL allows, and to offer protection against rising operation costs, Old Dominion Freight Line recently increased shipping rates. The 4.9% rate increase may also help mitigate the risk of rising costs due to inflation. Clearly, a move such as this reinforces the notion that they understand their customer base and expect limited pushback. It is also worth noting that a competitor, Fed Ex Freight Services (FDX), also increased rates; however, they did so by a higher average of 5.9%, which may displease their customers. Another noteworthy improvement, Old Dominion Freight Line has also worked vigorously to increase its employee count. From June to September in 2021 alone, they grew their full-time workforce by 20.9%. From there, they had also mentioned hopes to keep up this hiring spree through the fourth quarter. The willingness of management to take on new employees, especially that many, is a testament to just how confident they are moving into the future. On the other hand, management would also take advantage of the all-time highs reached throughout 2021 to sell shares; however, little fear should come of this.
General Insider Trades
As they continue to tout excellent performance, management has seemingly lacked the initiative to purchase shares and instead sold more than 47,000 shares throughout 2021; however, this does not justify a bearish sentiment on the stock. As this still leaves management with over 34% ownership in the business, reasons for selling could have been simply seeking liquidity themselves or that they were in the belief that share prices were bound to enter a correction. Either way, insider trades point to a general understanding that while growth may have been impressive, share prices rose too fast. Accordingly, this recent departure from ATHs may have been just what share prices needed to regain a path to future highs.
Technical Perspective
Recently, Old Dominion Freight Line has had generally bearish behavior; with that, a trend support line may be the key to finding the next reflection point. Additionally, the freshly touched 200-day Moving Average may offer support in conjunction with the trend line. This, by no means, understates the fundamental status and improvements witnessed in Old Dominion Freight Line; instead, it may be what is needed to help resuscitate share prices.
Notice both the 200 MA and Trend Support Line are now coming into contact.
Upcoming Q4 Earnings
While management did not offer formal guidance to upcoming earnings and the rate increases only came into effect as of early January, the Q4 earnings report, expected to be announced pre-market February 2nd, may shorten the length of this correction period. Speaking on the former, Senior VP of Finance, Adam Satterfield, stated he did not want to offer guidance but hinted at the performance the company expected:
We haven’t seen any let down with respect to demand. So it’s hard to call that we’re going to see any slowdown and certainly based on customer conversations and everything that we see and read, we feel like this unprecedented level of demand that we’ve seen this year will continue into next year (Q3 Earning’s Call Transcript).
It is also worth noting that similar to CEO Gregg Gant, Adam Satterfield has spent an excess of 17 years at Old Dominion Freight Line. Clearly, this dedication witnessed in management to remain within a single company is telling of the culture and dedication within Old Dominion Freight Line. Speaking again on the increased rates, this policy, which came into effect on January 3rd, will not be reflected in Q4 earnings though will surely help offset inflationary and further operation costs throughout 2022. Appropriately, consider this when viewing Q4 earnings and acknowledge that management is taking measures to limit the damage that may have arisen earlier from higher operation costs.
Final Thoughts
From the technical analysis perspective, it seems as though Old Dominion Freight Line is preparing to recover from its recent hit as two prominent indicators are approached. Frankly, this is not the most promising factor in the recovery of share prices; instead, the conscience, dedicated, management that looks to continually improve the business is where I see value amid a supply chain calamity that has led other businesses to stumble. Besides help from a possible technical rebound, Old Dominion Freight Line is clearly a buy when understanding it should soon return to historic highs as growth from supply chain shortages is brought by its excellent management.
