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By Pat Dorsey, CFA | 03-04-2010 12:29 PM

Picks to Keep Truckin'

Morningstar's Pat Dorsey says good businesses, and good buys, can come out of less-than-stellar industries.

Pat Dorsey: Hi, I'm Pat Dorsey, Director of Equity Research at Morningstar. As you know, if you followed Morningstar's Equity Research, we are big fans of companies with economic moats or structural competitive advantage, and we always maintained that some industries, frankly, are just better than others. It's just easier to make money as an asset manager or a data processor than it is running an airline or an auto parts company.

However, it's sometimes a mistake to think that industries that have poor economics don't have good investments. They may have very good operators within them or they may have companies connected to those industries that don't share the same core economic characteristics.

To wit: trucks! So I want to talk today a little bit about trucking companies, one of which is a wonderful business that's fairly valued, one that's a little undervalued, and one that looks like a screaming buy right now.

So the first is Heartland Express and this is a classic trucking company that owns trucks and drives them and hauls cargo for people--just what you think of when you think of a truck company. Unlike most trucking companies, however, this one is phenomenally profitable with returns on capital around 32% and operating margins of about 19%.

A trucking company with 19% operating margins is like an airline that pays a dividend. It's almost unheard of, and what is very fascinating about Heartland is that they do this in a very counterintuitive way. They pay their drivers about 30% more than most other ones. They have a very young fleet of trucks. These are both ways to increase costs, so you wouldn't think that the company with the more expensive cost structure in a commodity industry like trucking would be the most profitable. But what these things do is they reduce accidents, they reduce their insurance cost, they enable the company to provide better service to its customers, and they quite frankly just run a very lean, very tight ship.

We went and visited Heartland recently and confirmed our thesis that they simply execute on just about everything better than most of their peers. Heartland shares are fairly valued right now but certainly one to keep on your radar screen because the next time the economy takes a dip, the shares will probably sell off along with all of its cyclical companions.

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