3 Reasons ODFL is Risky and 1 Stock to Buy Instead

Old Dominion Freight Line has been treading water for the past six months, recording a small loss of 2% while holding steady at $158.68. The stock also fell short of the S&P 500’s 12.9% gain during that period.

Is now the time to buy Old Dominion Freight Line, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.

Why Is Old Dominion Freight Line Not Exciting?

We're sitting this one out for now. Here are three reasons why ODFL doesn't excite us and a stock we'd rather own.

1. Demand Slips as Sales Volumes Slide

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Ground Transportation company because there’s a ceiling to what customers will pay.

Old Dominion Freight Line’s units sold came in at 2.83 million in the latest quarter, and they averaged 3.2% year-on-year declines over the last two years. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Old Dominion Freight Line might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.

2. EPS Took a Dip Over the Last Two Years

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Sadly for Old Dominion Freight Line, its EPS declined by more than its revenue over the last two years, dropping 5.8%. This tells us the company struggled to adjust to shrinking demand.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Old Dominion Freight Line’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Old Dominion Freight Line isn’t a terrible business, but it isn’t one of our picks. With its shares trailing the market in recent months, the stock trades at 32.6× forward P/E (or $158.68 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

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