Old Dominion Freight Line Delivers Good News for Investors

In April, Old Dominion pleased investors with the news that its revenues had grown 15% year over year — even if the actual profits on those revenues lagged behind a bit (up only 13% year over year). While profits didn’t grow quite as quickly as one might have hoped, though, revenues for the quarter still hit record levels — “the highest quarterly revenue that we have ever produced,” as CEO David Congdon put it at the time.

Congdon also promised investors more good news to come, inasmuch as he commented: “Revenue growth accelerated throughout the quarter, and our momentum has continued thus far into April.” Now, it seems Old Dominion is delivering on that promise.

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Promise — delivered
On Tuesday, Old Dominion noted that so far this quarter, the weight in tons of products shipped per day in April was up 14.1% (over April 2013 levels), followed by a May increase of 14.5% (also year over year). Both these numbers lead management to believe that total growth for the fiscal second quarter will range somewhere between 14% and 14.5%.

Even better, the revenues that Old Dominion is able to collect on shipments is growing faster than the size of the shipments. “Revenue per hundredweight” is believed to have increased anywhere from 3% to 3.5% in comparison to last year — a greater increase than was previously expected.

Put another way, Old Dominion is shipping more boxes and charging more for each box shipped. Needless to say, this augurs well for both revenue and profits growth in Q2. Analysts who are positing $686 million in revenues for Q2, and $0.80 per share in profits (according to data from S&P Capital IQ) may be pleasantly surprised when the actual numbers come out in July. What’s more, Congdon noted Tuesday that the company is experiencing “ongoing growth in… market share,” as it competes with rivals in the LTL market.

What it means to investors
All of this — the optimistic guidance, and the more recent confirmation of that optimism — helps to explain why analysts think Old Dominion will grow its profits 19% this year, 15% more next year, and average annual profits growth of nearly 19% over the next five years. It explains, too, why investors are currently happily paying nearly 26 times earnings to own shares of Old Dominion stock.

It does not, however, necessarily mean that they are right to do so.

Even 19% profits growth, remember — and with earnings growth expected to slow in 2015, even this number seems in doubt — may not be enough to justify paying a 26-times multiple to earnings for this stock. Additionally, Old Dominion generates much less free cash flow from its business (just $38 million over the past year) than it reports as “net income” under GAAP ($211 for the same period). This suggests that the company may not even be as profitable an operation as meets the eye.

Long story short, business appears to be booming at Old Dominion Freight Line — as indeed it appears to be booming at many of its rivals. But a good business does not necessarily mean the stock is also a good buy. Caveat investor.