Old Dominion Freight Line (NASDAQ: ODFL) reported Thursday that the high-demand environment continued through May. The less-than-truckload carrier said May revenue per day was up 47.6% year-over-year, which followed a more than 50% increase in April.
The comparisons to the 2020 period benefited from a sharp decline in demand as COVID-related shutdowns were widespread during the first few months following the outbreak.
In the first two months of the second quarter, tonnage increased 31.1% and 28.3%, respectively.
Elevated consumer demand and a limited amount of truck capacity continues to push rates higher. Revenue per hundredweight, or yield, was up 15.3% quarter-to-date. Excluding fuel surcharges, the metric was 11.1% higher than the 2020 period.
“Old Dominion produced strong revenue growth for the first two months of the second quarter due to an increase in demand for our services and the ongoing improvement in the domestic economy,” said Greg Gantt, president and CEO, in the press release. “Our quarter-to-date revenue performance is above our normal sequential trend, which reflects our ability to win market share by delivering superior service at a fair price to our customers.”
The Thomasville, North Carolina-based carrier’s claim it is taking share could be supported by recent results from LTL peers. ArcBest Corp. (NASDAQ: ARCB) and Saia (NASDAQ: SAIA) also reported strong results on Wednesday but their year-over-year tonnage comps modestly lagged Old Dominion’s.
However, the comparisons to the prior-year periods are distorted by extremes on both ends of the equation.
A better indication of the strength of the LTL market was seen in ArcBest’s intraquarter report. The company announced that revenue improved 3% from April to May following a 6% increase from March to April. The sequential trends were “the best in the past 10 years” for the company.
Old Dominion credited the growth in tonnage to past terminal additions and capacity availability throughout its network. “We have available capacity within our service center network due to the significant investments we have made over many years,” Gantt added.
The carrier opened or increased door count at nine different facilities in 2020 and has plans for similar growth in 2021. Old Dominion’s real estate budget stands at $275 million for the year with an additional $290 million set aside for investments in tractors and trailers.
Old Dominion has been adding headcount as well to accommodate the heightened demand. In March, the company announced it was adding 800 drivers and more than 400 dockworkers.
It reported a 4.3% sequential increase in headcount during the first quarter. Usually there is no change in staff from the fourth to first quarter. On its first-quarter call, management said headcount normally increases 2% from the first to second quarter but this year additions are likely to surpass 5%.
“We remain committed to further expanding the capacity of both our workforce and our service center network this year, and we are confident that the continued execution of our strategic plan can produce long-term gains in market share and shareholder value,” Gantt concluded.
Analysts encouraged by Q2 trends
The growth rates slowed slightly in May but were “still extremely impressive and we believe well above expectations,” according to Deutsche Bank (NYSE: DB) analyst Amit Mehrotra. In a morning brief to clients, he laid out a scenario wherein Old Dominion could reach a sub-70% operating ratio, the inverse of operating margin, in the second quarter.
He said that his current earnings estimate is 23% above consensus, largely due to his outsized revenue expectation compared to his peers. He believes the carrier’s yield trends so far in the quarter could drive incremental margins supportive of the sub-70% level, which would be an industry record. He did caution that incremental margins could moderate somewhat as Old Dominion’s weight per shipment has declined.
Following the updates from ArcBest, Old Dominion and Saia, Cowen analyst Jason Seidl slightly raised his earnings estimates for all three as the results came in better than expected. His full-year earnings-per-share estimates for ArcBest and Saia were raised by 15 cents to $5 and $7.15, respectively. He bumped his Old Dominion estimate by a nickel to $7.85 per share. The per-share increases also flowed through to his 2022 estimates for each.
“Q2 is shaping up to be another strong quarter. Sequential trends in May appear to have softened slightly, off of a monster April, and ~inline with historical trends,” Seidl stated in the note.
Industrial economy heats up
LTL carriers may see continued growth for some time as the industrial sector heats up.
The Manufacturing Purchasing Managers’ Index increased 50 basis points to 61.2% in May, the fourth straight month the index was above 60%. An index reading above 50% indicates growth in the U.S. manufacturing sector.
LTL shipments have a high correlation to the PMI data, typically lagging fluctuations in the index by three months.
Subcomponents of the index – new orders (67%), production (58.5%) and order backlog (70.6%) – remained in expansion territory. While manufacturing inventories (50.8%) returned to growth, customers’ inventories (28%) fell lower, suggesting continued inventory replenishment is likely to keep the freight flowing.
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