Old Dominion: Upgrading Moat to Narrow on Robust Freight Density Advantage

We are upgrading our moat rating for Old Dominion ODFL to narrow from none. As with the rest of the truckload and less-than-truckload companies we cover, we historically considered Old Dominion a no-moat company, despite its impressive execution and robust economic profit. This is because it is extremely difficult to build a sustainable competitive edge in LTL shipping, as superior processes that optimize line-haul and pickup and delivery efficiency are replicable by well-capitalized competitors over time. Also, for most carriers, scale economies have proven insufficient to produce economic profit over the full cycle. Along these lines, we previously believed that a handful of Old Dominion’s competitors like XPO, Saia, and FedEx Freight would refine their execution, materially boost terminal capacity, and temper Old Dominion’s ability to take market share. However, although those carriers have made progress, it’s been much slower than expected and they haven’t discernably disrupted Old Dominion’s impressive performance.

In our view, Old Dominion is best characterized as having a narrow moat rooted in unmatched network/route density, which drives material cost advantages and industry-leading margins. Since LTL carriers consolidate freight from multiple shippers, higher levels of freight volume bestow greater terminal/truck utilization (leverage/fixed costs). Thanks to decades of unwavering terminal capacity investment and related, continuous market share gains, we believe Old Dominion has distinctively built a freight density advantage durable enough to support meaningful economic profit (on average) throughout the freight cycle, despite the price competitive nature of LTL shipping. Old Dominion is unique in this regard, and we don’t have the same conviction for the other large high-quality LTL carriers we cover.

Our moat upgrade boosts our discounted cash flow-derived fair value estimate to $255 per share from $224. However, the shares still look rich relative to our longer-term cash flow growth forecasts.