In 1991, Old Dominion Freight Line, the less-than-truckload motor carrier, had its IPO at a split-adjusted price of $1.76 per share. The company only had debt amounting to 2% of its total capital structure, and it was earning stated returns on equity of 16%. With the debt stripped out (i.e. the DuPont analysis in action), the unleveraged returns on equity were around the 15% range.
Just two years prior to the Old Dominion’s IPO date, Charlie Munger was lecturing the savings and loans institutions about the fact that “over long periods of time, companies will provide performances that largely track the underlying, unleveraged return on equity of the firm” and even indicating that boring, staid businesses with strong returns on equity were one of the best places to look for a good deal.
Since 1991, Old Dominion stock has returned 17.5% while delivering unleveraged returns on equity between 15% and 19% during that time period. The P/E ratio has increased a little bit between the initial IPO and the present date, hence explaining the disparity. Counting the dividends that were initiated in 2017, Old Dominion has delivered one hundred fold returns over the past twenty-eight years. As in, every $1 invested into the freight company grew into $100.
To this day, it is one of my favorite firms that is almost never discussed. If you pull up a stock screener, it will almost always appear to lag its peers because it is conservatively financed. It has $229 million in cash, $45 million in debt, and earns profits of $645 million. Many freight companies carry debt burdens that are almost 5x the annual profits, and therefore, appear to earn higher returns on equity even though they are just boosting the superficial data through the use of leverage.
If I had to simplify successful investing into three steps, I would say it’s all about conservative balance sheets, high sustainable unleveraged returns on equity, and low P/E ratios at the point in which the investment position was established. If someone bought a dozen stocks with those characteristics, I cannot imagine how the results would be disappointing.
Logistics providers are usually shunned because they are boring and eat up capital. Being a capital-intensive business is not a disqualifier, and in fact, can be a sign of a great business due to barriers to entry, when the unleveraged returns on the equity and capital are high.
The transportation of goods is scalable in a way that benefits established businesses looking to add routes. It costs real money to get goods from big cities to suburbs and surrounding rural areas. When you read the company’s annual reports, you will find it clear that the company only adds routes where it has financial reason to do so and only maintains warehouses in areas where the demand is obvious.
I personally get a kick out of the high long-term performance of these often-ignored companies that provide basic services. No one is going to be starting the 5 am hour on CNBC talking about Old Dominion’s price action. It is just a simple business that is conservatively financed and delivering high (unleveraged) returns on equity and creating real wealth for the households of its investors.