Landstar System: Seizing Dividend Potential On Weakness (NASDAQ:LSTR)

Introduction

On this article, I need to obtain at the least two issues.

1. Focus on an organization I’ve by no means lined on Looking for Alpha up to now. That firm is Landstar System (NASDAQ:LSTR), one in every of America’s largest transportation firms. Whereas its common dividend yield is not excessive, dividend progress is excessive and constant. When including the corporate’s skill to generate worth, we get a cyclical inventory with an incredible long-term threat/reward.
2. The corporate is among the victims of slower financial progress. Whereas its inventory value remains to be elevated, the corporate has lowered its steerage. This is not enjoyable for current shareholders, however it might pave the street for enticing entries within the subsequent few months.

In different phrases, I’ll clarify why I put the LSTR ticker on my watchlist, as I imagine it could be a terrific addition to dividend progress portfolios if the worth is true.

So, let’s get to it!

What’s Landstar System?

As that is my first LSTR article, let’s begin at first: what does LSTR do?

With a market cap of $6.2 billion, Landstar System is among the largest firms working within the Built-in Freight & Logistics trade.

The corporate is not a standard trucking firm. It operates as a technology-enabled, asset-light supplier of built-in transportation administration options. In different phrases, the corporate affords protected and specialised transportation providers to a various vary of shoppers via a community of brokers, third-party capability suppliers, and staff.

Landstar’s providers embody numerous transportation modes, which serve particular person shipments of freight and complete third-party logistics options.

The corporate primarily operates in the US.

Landstar providers its prospects via a community of over 1,100 impartial fee gross sales brokers and greater than 108,000 third-party capability suppliers, primarily consisting of truck capability suppliers.

To be able to handle all of this, the corporate makes use of digital applied sciences to attach its brokers and capability suppliers.

Its largest phase is Transportation Logistics, accounting for 98.8% of 2022 income. The hole to 100% is crammed by the Insurance coverage phase, which incorporates threat and claims administration providers.

In its Transportation Logistics Phase, the corporate:

• Supplies built-in transportation administration options throughout numerous modes, together with truckload, less-than-truckload, rail intermodal, air cargo, ocean cargo, expedited floor and air supply, heavy-haul/specialised, cross-border, venture cargo, and customs brokerage.
• Serves industries corresponding to automotive, client durables, constructing merchandise, metals, chemical compounds, foodstuffs, heavy equipment, retail, electronics, and navy tools.
• Makes use of impartial fee gross sales brokers to market its providers.

Evidently, its operations and prospects are extremely cyclical.

Regardless of these headwinds, LSTR is a complete return star with surprisingly low (comparatively talking) volatility.

Going again to 1994, LSTR shares have returned 15.9% per 12 months. This has turned $10,000 into $762,000. Throughout this era, it has outperformed the market by greater than 600 foundation factors per 12 months with a typical deviation of 26.4%. Whereas this customary deviation is above the market’s customary deviation (we’re evaluating a single inventory to a well-diversified basket), the chance/adjusted return of LSTR was additionally higher with a Sharpe Ratio of 0.61.

Moreover, this outperformance wasn’t simply attributable to a robust efficiency within the firm’s early post-IPO years. They’re very constant.

Trying on the decrease a part of the chart under, we see that the corporate has constantly outperformed the market with an more and more favorable customary deviation. Over the previous three years, the usual deviation was simply 22%, which is very favorable – particularly for a inventory with cyclical demand like Landstar.

So, what in regards to the Landstar dividend?

The Dividend Behind The LSTR Ticker

That is the half the place I’ll upset just a few individuals (at the least quickly).

LSTR pays a daily 0.7% dividend, which explains the large fats D+ within the firm’s in any other case handsome dividend scorecard.

Whereas a sub-1% yield is not what income-oriented traders want, it is backed by excessive constant dividend progress, which explains why the inventory is doing so nicely.

Basically, this follows the idea that constant dividend growers outperform the market with subdued volatility.

Including to that:

• The corporate has hiked its dividend for eight consecutive years.
• The common annual dividend progress fee of the previous 5 years was 19%.
• The latest hike was introduced on July 20, when the board accredited a 20% dividend hike.
• The payout ratio is simply 11%.

With that mentioned, the common dividend could also be low. Nonetheless, its particular dividend is not. LSTR has a historical past of paying juicy particular dividends.

Up to now few years, LSTR has constantly paid a $2.00 annual particular dividend.

Therefore, the present annualized dividend yield is not 0.7% however 1.8%, which is above the S&P 500’s dividend yield of 1.6%.

Moreover, I already briefly touched upon it, however this dividend is backed by a low payout ratio. The money payout ratio (together with the $2 particular dividend) is at simply 34% if we assume that analysts are proper and LSTR generates near $320 million in annual free money movement in 2023 and past.

Trying on the chart above, we see that free money movement is predicted to be far under 2022 ranges in 2023 (and past). This is because of very poor financial developments that damage an organization like LSTR.

Financial Replace & Valuation

Regardless of its cyclical enterprise, LSTR is extraordinarily resilient. The LSTR inventory value is lower than 9% under its 52-week excessive. That is uncommon, as financial progress indicators just like the ISM Manufacturing Index are hinting at contraction. The decrease a part of the chart under compares the overall sell-off of LSTR shares (% under its all-time excessive) to the ISM index. Proper now, we’re seeing an uncommon divergence.

That mentioned, the corporate’s financials aren’t immune. On April 26, the corporate introduced its 1Q23 earnings. Within the first quarter, the corporate reported a 27.4% decline in income.

Moreover, the corporate reported a gross revenue of $152.9 million, representing a lower in comparison with the gross revenue of $214.6 million in the identical interval final 12 months. The gross revenue margin was 10.7% within the first quarter of 2023, barely decrease than the ten.9% margin in 1Q22.

As anticipated, the corporate blamed softer demand and extra obtainable truck capability, which is, usually talking, what drives trucking profitability.

Digging a bit deeper, complete loadings on all transportation modes had been almost 13% under the 2022 first quarter, and loadings within the high 25 commodity classes decreased by 10%.

Revenues in all segments had been down.

Regardless of the lower in loadings, the corporate assured traders that Landstar’s lower in truckload quantity was primarily pushed by modifications within the general freight surroundings relatively than the lack of main accounts.

I agree with that. In any case, the proof is obvious. Not solely is the ISM index in contraction territory, however we additionally see that it has hit trucking indicators just like the ATA Truck Tonnage Index.

In response to the ATA:

Whereas the broader financial system continues to shock and to this point stave off an anticipated recession, the freight financial system is starkly totally different. The products-portion of the financial system is tender and consequently, even contract truck freight is now falling, albeit not almost as a lot because the spot market. The tonnage index hit the bottom stage since September 2021 in April and has now fallen on a year-over-year foundation for 2 straight months.

Consequently, Landstar simply lowered its guidance.

As reported by FreightWaves, Landstar indicated that each its income and earnings for the second quarter are anticipated to fall under the beforehand offered ranges, which had been introduced through the aforementioned first-quarter ends in late April.

Landstar’s administration initially acknowledged a slight deterioration in market circumstances in April however anticipated a customary seasonal enchancment in Might.

Sadly, this enchancment didn’t materialize.

The up to date steerage now forecasts income between $1.325 billion and $1.375 billion, reflecting a 5.3% discount in comparison with the midpoint of the earlier vary.

The downward revision is primarily attributed to a year-over-year decline in trucking a great deal of 16% to 18% through the first seven weeks of the second quarter, accompanied by a lower in income per load of 14% to 16%. The sooner steerage projected declines of 14% to 16% and 12% to 14%, respectively.

Moreover, Landstar has adjusted its EPS vary to $1.75 -$1.85, representing an 8% discount on the midpoint (a 15-cent lower on each ends). The consensus estimate on the time of the announcement on Tuesday was $1.97 per share.

In response to information from FreightWaves (and confirmed by the info used on this article), the trucking trade continues to battle with surplus capability, whereas spot charges haven’t stabilized.

With that mentioned, I don’t imagine that traders have priced in sufficient weak point. LSTR shares are buying and selling at 12.9x NTM EBITDA, which is near the longer-term median.

The identical goes for the free money movement a number of. Whereas LSTR is buying and selling at 9.9x LTM free money movement, it’s buying and selling at roughly 20x NTM free money movement. That is primarily based on the free money movement numbers we mentioned earlier on this article.

In different phrases, I am beginning to get curious about LSTR as soon as it drops under $140. That won’t occur (a threat of ready for a greater entry). Nonetheless, provided that I’ve roughly 50% industrial publicity, it is a threat I am prepared to take.

Takeaway

Landstar System, one in every of America’s largest transportation firms, presents a beautiful long-term threat/reward alternative for dividend progress portfolios.

Whereas its dividend yield could also be low at 0.7%, the corporate has a monitor file of constant dividend progress, with a median annual progress fee of 19% over the previous 5 years.

Moreover, LSTR has a historical past of paying particular dividends, which brings the present annualized dividend yield to 1.8%.

Furthermore, the corporate’s resilience is confirmed by its robust complete return, outperforming the market by over 600 foundation factors per 12 months with comparatively low volatility.

Regardless of dealing with headwinds as a consequence of slower financial progress, LSTR stays a stable performer. The current steerage adjustment displays the difficult freight surroundings, with a decline in trucking masses and income per load.

Nonetheless, the inventory value has not totally priced on this weak point. Buying and selling at affordable valuation multiples, LSTR turns into an intriguing funding alternative if it drops under $140.

Total, for traders in search of a cyclical inventory with robust dividend progress potential, Landstar is value contemplating, particularly on the proper value.