Old Dominion Revenue Drops For First Time In Three Years As Macro Weakness Bites

Even the gold standard of less-than-truckload (LTL) carriers can't escape the effects of the freight downturn triggered by the weakness in the nation's industrial production.

Old Dominion Freight Line, Inc. ODFL reported October 24 diluted third-quarter earnings of $2.05, down 7 cents a share from a year ago and six cents below estimates of analysts polled by Barchart. LTL revenue, which accounts for virtually all of Old Dominion's total revenue, fell 0.6% year-on-year, the first such decline in more than three years. Earnings before interest and taxes took a 5 cent a share hit due to $4.9 million in pre-tax losses from property and equipment disposals.

Operating income fell 4.8% to $217.5 million, while net income declined 5.4% to slightly more than $164 million. 

Daily tonnage declined 5.2% while weight per shipment fell 1% sequentially. Rrevenue per each hundred pounds of freight hauled, known as "revenue per hundredweight," rose 5.8%. The latter number excludes the impact of fuel surcharges. Including those, revenue per hundredweight rose 4.4%, reflecting the declines in diesel fuel prices and lower surcharge levels. Revenue per hundredweight is a key metric of LTL profitability.

Old Dominion's operating ratio, the ratio of revenues and expenses, rose to 79.3% from 78.4% in the 2018 quarter. The higher ratio was due to higher overhead costs that couldn't be efficiently leveraged due to the drop in revenue, Old Dominion said.

Greg Gantt, Old Dominion's president and CEO, said the results reflect the "challenging" operating environment that has been with the industry for months. Company executives have been telegraphing the top-line weakness and are forecasting no appreciable near-term change in the macro environment. U.S. industrial production, LTL's bread and butter. 

The Federal Reserve reported last week that industrial production fell 0.4% in September, the first year-over-year decline in three years. The decline was caused by weakness in mining, lower auto production due to a United Auto workers' strike at General Motors Corp. GM, and lower world oil prices.

The industry's top-line weakness has been offset by a resilience in pricing power, as carriers benefit from continued cost discipline and the effect of market concentration that discourages price wars. In 2018, the top 10 carriers controlled about 73 percent of the total market, according to data from Ship Matrix, a consultancy. 

Old Dominion is considered by most who are either in or who follow the industry as its best-run carrier. Its stature will likely lead analysts to give it the benefit of the doubt on the third-quarter results. Benjamin Hartford of Baird said the company's core results were "roughly in line with muted expectations." Amit Mehortra of Deutsche Bank began his early-day note with the heading of "Old Dominion: Not Superhuman All The Time."

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