Issue 37.2: LTL Logistics Industry Update
The freight recession rolls on yet valuations remain sky high. LTL competitors remain disciplined to their advantage.
Disclosure: Long BRK, TFIN
Intro/Background
This update aims to bring readers up to speed on the LTL logistics industry. Trucking remains in a freight recession going on for two years. LTL hasn’t been hit quite as hard due to a major competitor going bankrupt and as a result of general pricing discipline within the industry.
I last took a hard look at Old Dominion in October 2021. That analysis also briefly noted Saia, a smaller up-and-comer quickly becoming a real national competitor. I also looked at New Zealand-based Mainfreight in January 2024, a 3PL firm seeking to break into the US LTL market.
Yellow Bankruptcy
An important industry development occurred when century-old YRC Worldwide went bust in August 2023. The company had long been mismanaged and took a controversial $700 million CARES Act loan during the pandemic to stabilize operations. After battling with the Teamsters Union in the summer, the company shut down operations in July before filing for bankruptcy in August.
Even before its bankruptcy, the turmoil surrounding Yellow created a tailwind for competitors that revived the industry, which had slowed after the post-pandemic boom.
Competitors also salivated at the idea of picking up some of Yellow’s 169 terminals. Old Dominion put in a stalking horse bid (the first bidder that others must top) of $1.5 billion for all of Yellow’s terminals but the properties ultimately went to others for a cumulative recovery estimated at $1.9 billion. XPO Logistics acquired 28 properties for $870 million, Estes Express Lines took 24 terminals for $250 million, and Saia purchased 17 terminals for $240 million. Knight-Swift a mainly truckload carrier that entered the LTL space in 2021, bought 13 terminals for $51 million.
Market Share Update
FedEx still holds the #1 spot with its 17.4% US market share. ODFL remains in the #2 spot with 11.1% of the market. XPO comes in #3 with about an 8.9% share. All three are publicly traded. Other publicly traded companies in the top 10 include #6 Saia and #7 ABF/Arc Best. The #8 spot is TFI which is public and based in Canada.
It’s quite remarkable how much stability there is in the top 5, 10, and 25 spots.1
Old Dominion (ODFL)
ODFL has continued to do what it does best: daily blocking and tackling while investing for the future.
Results for the last three years follow the industry trend: up meaningfully in 2021 followed by a big gain in 2022 and a pullback in 2023, though muted by the gains from the Yellow debacle.
ODFL continues to demonstrate why capital intensity isn’t a dirty word. It controls almost all of its network and typically uses purchased transportation for its brokerage operations and for hauls across the Canadian border.
Record low claims and on-time service demonstrate the company’s spot at the top of the heap, if not in revenues but in quality of service and reputation.
Q1 results were decent but reflect some softness in the economy per management. Revenue per hundredweight increased 4.1% offset by a 2.7% decrease in weight/shipment and 0.5% decline in shipments/day. The operating ratio deteriorated 10bps to 73.5%. Overhead costs were up in part due to continued investment ahead of growth. Capex of $750mm is planned for 2024, about 2x depreciation. The company estimates it currently has about 25% to 30% capacity. An interesting exchange on the Q1 call noted that while competitors have mimicked ODFLs strategy of keeping about the same spare capacity, it only gives them the ability to grow, not the right to, which must be earned.
Despite management’s characterization of the last two years feeling like 2009, business performance appears pretty good. Unfortunately, shares reflect what seems to me a very rosy future. Shares trade at $171 as of this writing putting the market cap — and with a pristine balance sheet the enterprise value too — at $37 billion. That’s a very rich 22.5x TTM EBIT and nearly 30x TTM net income.
This leads me to one of the very few negatives about ODFL. The company persists in “returning” capital to shareholders with buybacks. At current prices, they’re almost certainly returning far less than $1 in value for every dollar sent out in buybacks.
I’d really like to own ODFL at the right price. It’ll probably take a major recession to cut shares down to size. Someday ODFL, someday…
Saia (SAIA)
You might consider Saia to be Old Dominion’s “little brother”. It’s about half the size of ODFL and is trending toward having similar economics. With its recent purchase of 17 Yellow terminals, Saia has nearly filled in coverage across the continental United States. That also explains its higher capital intensity in 2023, as the new investments haven’t fully been integrated.
Saia has work to do to catch up to ODFL. Its EBIT margins lag by over ten percentage points. This is in part due to the company’s use of purchased transportation, which is higher than ODFL but far below what you’d see at Yellow and some other competitors. I think the network density that ODFL enjoys translates into greater operating efficiencies.
Saia is doing its part to get to scale. Management describes the current environment as a generational opportunity to build its network. In addition to the Yellow terminals, Saia plans to invest $1 billion in expanding its network in 2024 adding 15-20 terminals, primarily in the central Great Plains states. I like that management maintains the flexibility to scale that back as conditions dictate and that it aims to staff the new locations with seasoned Saia employees.
On its most recent earnings call Saia management highlighted an important industry dynamic that to a certain degree insulates it from the ongoing truckload freight recession. Truckload freight is generally limited to one trailer going to one destination. Truckload companies lack the necessary infrastructure to make multiple pickups and multiple deliveries. The drivers aren’t equipped for it nor are they trained (or want) to make multiple stops. While some smaller TL companies might take a few loads from LTL, the effect should be very small for the reasons described above. As an aside, I wonder if the effect could go the other way: if for some reason TL was very tight could LTL fill the gap using its equipment? Probably.
Saia’s Q1 results were strong with revenues up 14.3%. Revenue per hundredweight (ex. fuel) increased 10.5%, revenue per shipment increased 1.4% and weight per shipment declined 8.2%. The operating ratio improved 60bps to 84.4%.
Saia shares trade at $402 as of this writing or a market cap of about $10.7 billion. That translates into 22x TTM EBIT or 29x net income (Saia has de minimus net debt), basically on par with big brother ODFL. Suffice it to say I’m more interested in Saia’s business prospects than what its shares are likely to deliver.
XPO Logistics
XPO is in the process of divesting its European business to become a pure-play LTL carrier in the US. Its consolidated metrics don’t compare well since it includes the brokerage, TL, and other operations in Europe.
The company’s Q1 conference call is worth noting for its similarities to ODFL and Saia. Like those two companies, XPO continues to invest in capacity despite the relatively weak freight market. Highlighting the TL/LTL differences discussed above, XPO (like other LTL carriers) continues to be able to increase pricing.
In its North American LTL segment yield ex. fuel increased 9.8% and tonnage increased 2.6%. Tonnage reflected a 4.7% increase in shipments offset by a 1.9% decrease in weight/shipment.
The company continues to integrate its Yellow terminal acquisitions (28 in total) and expects to have them all open by early next year. I learned something new in this conference call: XPO manufactures some of its trailers. It’s the only LTL carrier to do so. It thinks this is a strategic advantage allowing it to increase capacity when needed.
XPO is focusing on creating system density and improving service, which appears to be working. Management reiterated its intent to sell the European operation but hasn’t set a hard deadline for doing so.
With shares at $110, the company sells for about $13 billion — almost identically priced as competitors in terms of multiples.
FedEx
In Q4 2023, FedEx announced it was consolidating everything but its LTL freight business under the corporate umbrella, leaving FedEx Freight as a stand-alone company owned by the parent. FedEx says the freight unit is critical to its success in the future, but one can’t help but wonder if it’s planning on spinning off the unit. One look at public LTL multiples and it’s not a leap to think investment banks are clamoring for the chance to take the unit public.
FedEx’s Q3 results for its Freight Segment (LTL) ending February 29, 2024, reported revenues of $2.1 billion, down 3% from the same quarter in 2023. Operating income of $340 million results in an EBIT margin of 16%. Said another way, the Freight operating ratio was 84%.
Arc Best
A couple of quick comments on ArcBest. I still consider it to be a second-rate competitor without the scale needed to compete nationally with the top players. This is perhaps evident in the company’s decision to buy MoLo, a freight brokerage business in late 2021 (just in time for the longest freight recession in history). That partially explains why returns on capital are so high relative to its EBIT margins.
EBIT margin for asset-based (aka LTL) was 8.8% in 2023, down from 12.7% in 2022, and 10.1% in 2021. Purchased transportation was 11.8% of 2023 asset-based revenues. Its operating ratio in LTL came in at 91.2%.
A look at some key metrics seems to indicate ArcBest’s competitors are taking share from it. In 2023, yield decreased 2.2% and tonnage declined 2.6% (shipments up 3.2% but pounds down 5.4%).
Shares trade at a market cap of $2.4 billion or 14x earnings. I’m inclined to stay away given the sub-par quality of the company (my opinion). Still, there could be an upside considering the asset-lite business is currently losing money and the larger LTL competitors remain rational despite current weakness.
Bottom Line
Overall there’s not much to get excited about in the LTL space right now. But it’s still good to keep tabs on the industry and to watch the watchlist so that one can be ready when Mr. Market throws a pitch right down the middle.
Stay rational! —Adam
There’s something weird in the data for Yellow/YRC. Its market share in 2020 seems too high. In 2020, SJC reported its revenues at $2,988mm and in the 2021 report, it shows 2020 revenues as being $4,488.