- Multiple banks have increased price targets for Old Dominion Freight Line, indicating they expect the carrier's stock price to rise. Old Dominion reached a 52-week high during trading on Monday after KeyCorp raised its price target from $200 to $220, according to MarketBeat. Credit Suisse, Citigroup, Deutsche Bank, Morgan Stanley and Stephens upped price targets.
- Deutsche Bank raised its price target from $133 to $166, according to a research note published Aug. 4, citing "[management's] proven ability to control costs in a downturn." Deutsche Bank maintained its "hold" rating, which reflects the analysts' recommendation to neither buy nor sell shares.
- "We believe ODFL has continued to excel in controlling the variable portions of its cost structure to match the softer demand it is currently seeing in the LTL market," a Stephens analyst wrote in a research brief published June 5. In that note, Stephens maintained its "overweight" rating for the carrier and raised its price target from $150 to $190. A rating of "overweight" indicates the analyst believes that in the future the specific stock should perform better than the general industry.
Old Dominion is typically one of the most profitable in the business, aided by its long-term commitment to balancing cost controls with strategic expansion. So far, the coronavirus pandemic hasn't pushed the LTL provider far from that path, and analysts are willing to bet Old Dominion will successfully withstand the headwinds.
Deutsche Bank increased its earnings-per-share forecast directly following the carrier's second-quarter earnings call. In the call, CEO Greg Gantt told analysts a focus on customer service led Old Dominion to new business.
The company set a record operating ratio in Q2 at 77.8%, an improvement of 10 basis points over the same period in 2019. It helped drive a 15.6% year-over-year decline in operating expense, which offset a 15.5% YoY decline in revenue, according to Deutsche Bank. "We expect similar dynamics to aid back-half profitability," the analyst wrote.
Stephens noted it was confident in Old Dominion's long-term strategy for network expansion, even though the carrier delayed some of its short-term plans, such as opening new service centers. Specifically, the analyst mentioned Old Dominion's commitment to investing in real estate.
"While others in the LTL space have opted to cash in on a strong market for commercial real estate over the last 18 months by engaging in sale-leaseback transactions or selling terminals entirely, ODFL has been clear in its long-term strategy around profitable growth and staying ahead of its demand curve," according to the note.
Old Dominion uses company-owned service centers to address under-serviced markets, and the company has about 20%-30% of latent network capacity it can deploy if needed, according to Stephens.
The analyst was encouraged by the carrier's efforts to stay away from third-party linehaul costs. Doing so "should provide a cost advantage vs. peers as rates in the Truckload market rise in the quarters ahead," the note stated.
Analysts also consider the health of the industry as a whole when evaluating companies in the segment.
Looking at market conditions in July, Deutsche Bank concluded demand looked "fairly stabilized," and said it was "encouraged" by the industry's outlook. The analysts wrote they expected trucking firms to benefit from reduced net supply and the demand that is currently rebuilding, continuing the improvement that started after the market experienced significant volume drops in April and May.
"Upside risks include a quicker-than-expected rebound in demand and stronger pricing. Downside risks include the macro, weaker-than-expected pricing and valuation," the Deutsche Bank note said.
Stephens said economic factors as some of the greatest risks to Old Dominion stocks, as well. A sustained period of down industrial activity would be bad for the entire LTL sector, the note said, as would an environment of competitive pricing. During the Great Recession, "certain carriers" were not disciplined in pricing, according to the note, which affected the whole sector.
"Sustained lower fuel prices could have a negative impact on earnings as we believe the LTL carriers benefit off higher fuel surcharges as well as pressuring the O&G/industrial end markets," the note said, also mentioning that new competition in regional markets could decrease Old Dominion's business.
But Stephens said "the strong will only get stronger" as the economy emerges from recession. Financially weaker fleets may have cut costs to stay afloat, which the Stephens said would "only erode their service."
"This theme isn't new, and has been a key factor behind ODFL's tonnage and revenue momentum over the past two decades. With ODFL executing on a proven playbook, we believe the stage is set for strong top and bottom line momentum as the post-Covid[-19] economic expansion takes hold later this year," according to the Stephens note.
Stephens expects Old Dominion to benefit from "further consolidation in the LTL sector," which it projects will occur over the next few years.