Old Dominion Earnings: Retail Destocking and Softening Industrial Sector Hit Tonnage

Top-tier less-than-truckload specialist Old Dominion’s ODFL top line swung negative in the first quarter, falling 4% year over year (it was still up 6% in the fourth quarter). Revenue came in slightly shy of our forecast due to a greater-than-expected tonnage declines, though yields outperformed modestly. Tonnage declines accelerated in the quarter, falling 12% year over year compared with a 9% contraction last quarter and a 3% fall in the third quarter. Total core yield (revenue per hundredweight excluding fuel) expanded 9%, similar to the fourth-quarter increase. Retail sector restocking has retrenched on elevated inventories, and industrial end markets started softening by the end of 2022, pressuring volumes across the LTL industry following an exceptionally robust growth phase. That said, the current trucking backdrop is not unexpected and we’ve already been baking in a pullback in 2023.

Following roughly three years of consistent year-over-year improvement, Old Dominion’s operating ratio (expenses/revenue) worsened 50 basis points to 73.4%. The OR came in modestly worse than our expected run rate, though we’ve been anticipating normalization this year on the back of tough comparisons, lost leverage from falling tonnage, and wage and cost inflation. We expect to temper our 2023 revenue and margin assumptions, but that should be mostly offset by the time value of money. Thus, we do not expect to materially alter our $223 discounted cash flow-derived fair value estimate. The shares remain overvalued relative to our long-term free cash flow forecasts.