Key Considerations Before Selling ODFL After Recent Rally

One of Wall Street's biggest winners of the day is Old Dominion Freight Line, a integrated freight & logistics company whose shares have climbed 3.1% to a price of $197.79 -- near its average analyst target price of $192.66.

The average analyst rating for the stock is hold. ODFL may have outstripped the S&P 500 index by 3.0% so far today, but it has lagged behind the index by 35.1% over the last year, returning 4.3%.

Old Dominion Freight Line, Inc. operates as a less-than-truckload motor carrier in the United States and North America. The company belongs to the industrials sector, which generally includes cyclical companies -- with the exception of conglomerates whose business may span several industries. Cyclical companies experience higher sales during periods of economic expanision, and worsening outlooks during recessions.

Old Dominion Freight Line's trailing 12 month P/E ratio is 34.6, based on its trailing EPS of $5.72. The company has a forward P/E ratio of 33.1 according to its forward EPS of $5.97 -- which is an estimate of what its earnings will look like in the next quarter.

As of the third quarter of 2024, the average Price to Earnings (P/E) ratio for US industrials companies is 25.42, and the S&P 500 has an average of 29.3. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

ODFL’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.

When we perform the calculation for Old Dominion Freight Line, we obtain a PEG ratio of 4.32, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.

Old Dominion Freight Line's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023 1,569,135 757,309 811,826 -11.41
2022 1,691,582 775,148 916,434 38.32
2021 1,212,606 550,077 662,529 -6.41
2020 933,024 225,081 707,943 40.31
2019 983,888 479,325 504,563 61.81
2018 900,116 588,292 311,824
  • Average free cash flow: $652.52 Million
  • Average free cash flown growth rate: 14.7 %
  • Coefficient of variability (lower numbers indicating more stability): 0.0 %

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in ODFL have received an annualized dividend yield of 0.5% on their capital.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Old Dominion Freight Line's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 10, so the company's assets may be overvalued compared to the average P/B ratio of the Industrials sector, which stands at 3.2 as of the third quarter of 2024.

Old Dominion Freight Line is by most measures fairly valued because it has a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and generally positive cash flows with an upwards trend. The stock has mixed growth prospects because it has a an inflated PEG ratio and strong operating margins with a positive growth rate. We hope you enjoyed this overview of ODFL's fundamentals.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.

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