Landstar Earnings: Freight Backdrop Under Pressure but No Major Surprises

Wide-moat truck broker Landstar’s LSTR second-quarter gross revenue plummeted 30% year over year—below our forecast as both price and volume underperformed normal seasonality to a greater degree than we anticipate. Recall revenue swung negative in fourth-quarter 2022 after surging more than 33% year over year over the previous four quarters. In short, retail-sector destocking (high inventories), sluggish industrial end markets, and now-loose truckload industry capacity continue to pressure freight demand and sell-rates to shippers, especially relative to exceptionally strong levels a year ago. For the core truckload business, loads fell 16%, while average revenue per load was down 12.5%, which also includes the impact of falling fuel surcharges.

The sluggish demand backdrop isn’t surprising, given normalizing U.S. goods spending, and neither is the sharp correction in spot truckload rates this past year, given loosening industry capacity off a massive capacity crunch. Landstar has high exposure to the dry van and flatbed spot markets, which surged throughout 2021 and into first-half 2022 on ubiquitous carrier tender rejections. Generally speaking, truckload freight demand is normalizing, not plummeting, and we suspect conditions will bottom in late 2023 or early 2024, assuming the retailer destocking phase abates. We note that truck revenue during first-half 2023 was still 34% above prepandemic first-half 2019 levels.

Landstar’s adjusted net operating margin (EBIT/net-revenue less agent commissions) fell to 44.4% off extremely lofty levels a year ago (56.2%). Margins are trending below our expected run rate on incremental lost operating leverage.

We will likely temper our 2023 model assumptions, but we continue to expect material improvement in 2024 as the current pullback phase runs its course. We do not expect to materially alter our $165 DCF-derived fair value estimate. The shares are slightly rich relative to our longer-term free cash flow growth forecasts.