This column originally appeared at RealMoney on November 19, 2007
Along with most of the rest of the trucking industry, the news on Friday from FedEx (FDX - Annual Report) and YRC Worldwide (YRCW) sent shares of Landstar (LSTR - Annual Report) down sharply, briefly causing it to breach the 52-week low. Landstar has long been one of my favorite names, and I took the opportunity to buy some shares because I think the current valuation will be tough to beat.
Don’t get me wrong – I’m not arguing that trucking revenues are about to ramp up across the board. As the chart below shows, the industry has been slowing since early 2006 and despite the little uptick in September the year/year change was a decline of 2.3%. Demand for trucking services is bad, and the slowing
Source: American Trucking Associations
No, the main reason I like Landstar for the long haul (har!) is their business model. Rather than own their own trucks, they outsource the loads to owner operators who provide their own rigs. The business capacity owners (BCOs in Landstar terminology) get the lion’s share of the revenue for the load, which encourages them to haul as many as they can. This is a virtuous cycle that benefits both Landstar and their BCOs. More than 30,000 rigs are in the Landstar network, though some are much more active than others.
But the benefit isn’t just incentives to work harder. The revenue sharing process means that most of Landstar’s expenses are variable rather than fixed. When business is slowing for the trucking industry as a whole, Landstar’s expenses fall in proportion to any decline in revenues and the company is able to remain profitable.
For regular trucking companies like YRC, each unassigned truck is a drag on profitability. The truck certainly represents a depreciation expense and could also represent an economic expense if it is leased or purchased on credit. Every truck without a driver hurts the company.
At Landstar, an empty truck hurts the driver, who then has that much more incentive to haul some merchandise, earn some money and make the truck payment.
Although Landstar reported a 3% decline in total revenue during the first nine months of 2007, the decline was mostly due to a fall-off in one contract. The company provides disaster-relief services for FEMA and the milder hurricane season in 2006 led to lower revenue in early 2007 than was experienced post Katrina and Rita for 2005/2006.
According to Landstar’s latest 10Q, revenue would have been up 5% excluding FEMA business in both years. Contrast that with the decline in overall industry revenues, and I smell market share gains. The industry may be slowing down, but I don’t think Landstar is.
Over the last 12 months, Landstar generated $167 million in free cash flow. Nearly all of its operating cash goes to share repurchases and dividends since the company isn’t buying trucks. On a $2.1 billion enterprise value, that amounts to an 8% free cash flow yield – more than twice the yield on Treasury bonds and a healthy risk premium in today’s market.
What’s more, Landstar’s 5% apples-to-apples growth in a bad year suggests the longer-term growth rate could be significantly higher. With today’s price justified even without any growth, the prospect of an eventual return to double-digit growth rates gets my mouth watering.
Sure, the P/E of 17x is significantly higher than YRC’s 6x. But the lack of capital requirements, the absence of YRC’s $1.5 billion in debt and the variable cost nature more than justify the higher P/E in my opinion.