Description
ODFL is a great company. A really great company.
But also, it is a high fixed cost business that has benefited from massive tailwinds (Covid/delivery) and incompetent/ hamstrung competition. As a result, it has incredible margins that I believe are likely to shrink, not expand.
Consider the competition:
FedEx Freight: Biggest player, investing aggressively to further grow share
UPS Freight: Historically mediocre, recently acquired by TFI and in the midst of a turnaround
Yellow: Teetering on bankruptcy until the CARES Act removed the pension liability risk, now taking needed steps to modernize the business
ArcBest: Also helped significantly by CARES Act, also improving
Knight: Having conquered the TL world, they are rolling up mid-size competitors to build a formidable LTL offering
Amazon: Significant logistics aspirations, especially after they have overbuilt their infrastructure; think AWS for fulfillment
As of late, a shortage of drivers and trucks has allowed all players to take a ton of price. However, once these shortages ease (as they are currently doing), the economics of a fixed terminal network and a dozen competitors dictate pricing competition to win marginal loads.
Having surpassed their 20% OM goal, ODFL then set a 25% goal, which they recently surpassed. Now they claim that 30% is achievable, but how many industrial companies (with no technology/IP) can sustain that margin?
If we go back to the EBITDA/employee that ODFL had back in 2019, and put a 10x multiple on that EBITDA (the 2019 multiple), then the stock will trade in the low 100s, more than 50% downside.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
freight environment slows as consumer continues to be pressured
capacity expands as trucks and drivers normalize
margins start to compress as competitors cut price to gain share