After posting a second-best third quarter, only to 2018, truck broker Landstar System Inc. (NASDAQ: LSTR) could be closing in on a new record in the fourth quarter.
On the company’s Thursday earnings call, management said the current truck market, highlighted by high demand and tight capacity, should continue through the quarter, noting that the company is operating at peak levels even though peak season hasn’t really kicked in yet.
The Jacksonville, Florida-based company reported third-quarter earnings per share (EPS) of $1.61, 19 cents higher than analysts’ forecasts and 26 cents higher year-over-year. The result also bested its increased outlook provided in September, which raised EPS to a range of $1.40 to $1.46 from the original guide of $1.11 to $1.17 provided in July.
Unlike some brokers that have large exposure to contracts and are forced to purchase capacity at higher prices when supply tightens and rates climb, Landstar is primarily a spot broker with a highly variable cost structure that affords it more flexibility as demand fluctuates.
Demand hotspots and capacity coming back to Landstar
Landstar reported strength in demand for verticals like consumer durables, automotive, building products and linehaul service. Revenue from consumer durables shipments increased 11% year-over-year in the third quarter after declining 22% during the second quarter. Automotive revenue was up 17% in the third quarter after a 53% decline during the second quarter, and building products revenue increased 15% after a 21% decline in the second quarter.
Substitute linehaul service – truckload service for large parcel and small package transportation providers – increased 125% year-over-year in the quarter as consumers transitioned to an online-buying lifestyle and haulers looked outside of their networks for surge capacity to meet the higher demand. Consumer durables accounted for 26% of third-quarter transportation revenue, with linehaul service making up approximately 5% of revenue.
Revenue from heavy industrial shipments like machinery (-12%), metals (-12%) and energy (-26%) remained under pressure.
Landstar saw capacity come back to its network as well. Trucks from business capacity owners (BCOs) increased 130 units year-over-year, 272 higher than the second quarter. BCO truck count has increased another 100 units so far in October to an all-time record. Management said the return of capacity providers to the Landstar network occurred as load volumes grew. They believe it’s tougher to bring back company drivers that are furloughed during downturns versus owner-operators who have invested in their career decisions by owning their equipment.
Capacity from total truck providers increased 10% year-over-year and 15% sequentially. Management said it isn’t sure how much parked capacity is still on the sidelines but does not believe it to be all that significant. Landstar management expects supply to remain tight moving forward.
Fourth-quarter guidance ahead of consensus
Truck loads have increased in the high-single-digit range year-over-year thus far in October. Management expects a similar increase in loads for the fourth quarter with truck revenue per load increasing in the low double-digit percentage range. Revenue is expected to be in the range of $1.15 billion to $1.2 billion, compared to the current consensus estimate of $1.09 billion with adjusted EPS of $1.61 to $1.71 versus analysts’ current forecast of $1.51.
The EPS range excludes 29 cents per share, $15 million, of a one-time expense related to the restructuring of legacy compensation plans with independent sales agents.
The company’s fourth-quarter guidance brackets its EPS record set in the fourth quarter of 2018.
Looking into 2021, management expects current trends to hold at least into the beginning of the year. They noted that the recent market strength has only been present for three months and that there is still some unpredictability. Gross margins are expected to remain in the 14.5% to 14.8% range as volumes are weighted to brokerage, carrying a lower revenue per load.
Expenses that were muted during the pandemic like travel and entertainment and medical benefits will present headwinds as the frequency increases. Other cost headwinds include insurance premium increases, up $14 million year-over-year, and incentive and stock-based compensation reaching maximum payouts. Cost offsets include the commission restructuring, the cessation of pandemic relief payments ($13 million) and the potential for more employees to work from home post-COVID.
Company executives said they “see no reason” for a pullback in the economy and believe a 50% operating margin is achievable.
Third-quarter results
Revenue increased 7% year-over-year with total truck loads up 3% and revenue per load increasing 5%, in line with the September guidance increase. The year-over-year progression in dry van comparisons was notable. Loads increased from flat year-over-year in July to up 9% by September, with revenue per load up only 3% in July but 17% higher by the last month of the quarter.
Gross margin was stable at 14.8%, 30 basis points lower year-over-year. Cost controls helped drive the operating margin, operating income divided by gross profit, 490 basis points higher to 51.2%. Insurance and claims and other operating costs declined 80 basis points as a percentage of BCO revenue.
Landstar has generated $186 million in cash flow from operations in 2020, ending the third quarter with $258 million in cash and short-term investments and $216 million of undrawn revolving credit capacity. The company reported a net cash position of $170 million, $45 million lower year-over-year, and debt-to-capital at only 11%.
The company will make a decision in December as to how it will deploy the favorable cash position. The two primary methods have historically been share repurchases or special dividends. At the end of 2019, the company paid a one-time cash dividend of $2 per share.
Shares of LSTR are flat up 1% on the day compared to the S&P 500, which is flat.
