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Old Dominion Stock Down 8% in Six Months: What's Next for Investors?
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Shares of trucking company, Old Dominion Freight Line (ODFL - Free Report) , have not had a good run lately, declining 8.2% in the past six months. While ODFL has performed better than its industry, the stock’s performance was worse than the S&P 500 index, of which it is an integral part.
Six-Month Price Performance
Image Source: Zacks Investment Research
Let’s take a look at the factors responsible for the disappointing price performance.
Freight Market Downturn: Old Dominion is being hurt by reduced demand for freight services. Due to the weak freight demand, shipment volumes and rates are low. The top line has been suffering, mainly due to the below-par performance of its key segment, namely, less-than-truckload services.
Segmental revenues declined 6% year over year in 2023. Due to lackluster revenues, the operating ratio (operating expenses as a % of revenues) in 2023 deteriorated to 71.8% from 71.2% in 2022 despite ODFL's cost-cut efforts. A lower value of the metric is preferable. Weakness regarding the freight market is unlikely to go away any time soon as demand remains soft.
Rising capital expenses: These further add to its woes. At ODFL, capex was $225.1 million in 2020, $550.1 million in 2021, $775.1 million in 2022 and $757.3 million in 2023. For 2024, ODFL anticipates its total capital expenditures to be approximately $750 million. Of the total, $350 million is anticipated to be invested in real estate and service center expansion projects, $325 million in tractors and trailers and the remaining $75 million in information technology and other assets.
Capital expenditure spending doesn't come to an end after buying an asset. Companies need to keep up with repairs and maintenance to protect the value of the investment. Such elevated capex in this weak demand scenario may dent current-year profit margins.
The truck industry, of which Old Dominion is an integral part, has been persistently battling driver shortage for several years. As old drivers retire, trucking companies find it difficult to hire new drivers since the job does not appeal to the younger generation. According to an estimate given by Bob Costello, chief economist and senior vice president for the American Trucking Associations, the United States will face a crunch of 160,000 drivers by 2030. This projection does not bode well for Old Dominion.
The still-high inflation reading continues to hurt consumer sentiment and growth expectations. With labor and material costs showing no signs of letting off, the ability to pass these increases through the consumer will determine the profitability of trucking companies like ODFL.
Unfavorable Earnings Estimate Revisions for ODFL
The bearish alterations in earnings estimate revisions, as shown below, underscore a notable decline in brokers' confidence in the stock.
Image Source: Zacks Investment Research
ODFL’s Valuation: Another Woe
From a valuation perspective, ODFL is trading at a premium compared to the industry, going by its forward 12-month price-to-earnings ratio. The high P/E multiple reflects the high expectations for the company’s growth. However, the deceleration in revenue growth raises concerns that the stock's current valuation is too high to be justified. The reading is also above its median in the last five years. The company has a Value Score of F.
Image Source: Zacks Investment Research
ODFL’s valuation compares unfavorably to other industry players like Knight-Swift Transportation Holdings (KNX - Free Report) and ArcBest Corporation (ARCB - Free Report) .
Final Verdict
With Old Dominion mired in multiple headwinds, as highlighted throughout the write-up, the stock is an unimpressive investment option currently. As there is significant doubt about whether the challenges faced by ODFL will ease in the near term, investor sentiment surrounding this transportation heavyweight is unlikely to get a boost any time soon. The combination of its weak current performance and an uncertain future casts a shadow on ODFL’s prospects. So, the stock, currently carrying a Zacks Rank #4 (Sell), appears a risky prospect for investors.
Shares of trucking company, Old Dominion Freight Line (ODFL - Free Report) , have not had a good run lately, declining 8.2% in the past six months. While ODFL has performed better than its industry, the stock’s performance was worse than the S&P 500 index, of which it is an integral part.
Six-Month Price Performance
Let’s take a look at the factors responsible for the disappointing price performance.
Freight Market Downturn: Old Dominion is being hurt by reduced demand for freight services. Due to the weak freight demand, shipment volumes and rates are low. The top line has been suffering, mainly due to the below-par performance of its key segment, namely, less-than-truckload services.
Segmental revenues declined 6% year over year in 2023. Due to lackluster revenues, the operating ratio (operating expenses as a % of revenues) in 2023 deteriorated to 71.8% from 71.2% in 2022 despite ODFL's cost-cut efforts. A lower value of the metric is preferable. Weakness regarding the freight market is unlikely to go away any time soon as demand remains soft.
Rising capital expenses: These further add to its woes. At ODFL, capex was $225.1 million in 2020, $550.1 million in 2021, $775.1 million in 2022 and $757.3 million in 2023. For 2024, ODFL anticipates its total capital expenditures to be approximately $750 million. Of the total, $350 million is anticipated to be invested in real estate and service center expansion projects, $325 million in tractors and trailers and the remaining $75 million in information technology and other assets.
Capital expenditure spending doesn't come to an end after buying an asset. Companies need to keep up with repairs and maintenance to protect the value of the investment. Such elevated capex in this weak demand scenario may dent current-year profit margins.
The truck industry, of which Old Dominion is an integral part, has been persistently battling driver shortage for several years. As old drivers retire, trucking companies find it difficult to hire new drivers since the job does not appeal to the younger generation. According to an estimate given by Bob Costello, chief economist and senior vice president for the American Trucking Associations, the United States will face a crunch of 160,000 drivers by 2030. This projection does not bode well for Old Dominion.
The still-high inflation reading continues to hurt consumer sentiment and growth expectations. With labor and material costs showing no signs of letting off, the ability to pass these increases through the consumer will determine the profitability of trucking companies like ODFL.
Unfavorable Earnings Estimate Revisions for ODFL
The bearish alterations in earnings estimate revisions, as shown below, underscore a notable decline in brokers' confidence in the stock.
ODFL’s Valuation: Another Woe
From a valuation perspective, ODFL is trading at a premium compared to the industry, going by its forward 12-month price-to-earnings ratio. The high P/E multiple reflects the high expectations for the company’s growth. However, the deceleration in revenue growth raises concerns that the stock's current valuation is too high to be justified. The reading is also above its median in the last five years. The company has a Value Score of F.
ODFL’s valuation compares unfavorably to other industry players like Knight-Swift Transportation Holdings (KNX - Free Report) and ArcBest Corporation (ARCB - Free Report) .
Final Verdict
With Old Dominion mired in multiple headwinds, as highlighted throughout the write-up, the stock is an unimpressive investment option currently. As there is significant doubt about whether the challenges faced by ODFL will ease in the near term, investor sentiment surrounding this transportation heavyweight is unlikely to get a boost any time soon. The combination of its weak current performance and an uncertain future casts a shadow on ODFL’s prospects. So, the stock, currently carrying a Zacks Rank #4 (Sell), appears a risky prospect for investors.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.