Old Dominion Freight Line Driving To New Highs

Key Points

• Old Dominion Freight Line is moving up on strong earnings. 
• A 33% dividend increase is helping to support the market. 
• A new high may be set; whether the market stays there is the question to be answered. 

A look at the charts suggests that Old Dominion Freight Line NASDAQ: ODFL is driving to new highs. The price action spiked more than 6.5% in the wake of the company’s Q4 results and has it trading at the highest levels in 13 months and showing strongly bullish signs.

The question that needs to be answered is if the stock will break out and sustain the move; results suggest that is possible as well. The company outperformed expectations and increased its dividend by 33% compared to last year. That’s 33%, a full dime per quarter to $0.40 or $1.60 annually.

Not a huge amount, given the stock price, but this company is paying only 9% of its earnings and has been increasing the payout at a very high double-digit pace for the last few years, and the expectation for more is getting priced into the action. 

Old Dominion Gets In Geat After Strong Results 

Old Dominion Freight Lines' results are mixed relative to the analysts’ expectations but in a way that leaves nothing to be desired. The revenue for this LTL specialist fell short by a hair but is up 5.8% versus last year and came with an improved margin. The revenue was driven by an increase in pricing offset by volume, but volume remains strong relative to pre-pandemic levels.

In regard to the margin, the company’s operating ratio improved by 240 basis points due to efficient operation and left the operating income up 15.5% versus last year. However, the news that got the market’s attention is the $2.92 in GAAP earnings that came in 21% better than last year and a full quarter better than the Marketbeat.com consensus estimate. 

Old Dominion didn’t give any guidance, but it is seeing strength in the business. The good news for the business and the consumer is that the falling costs that are aiding Old Dominion’s bottom line may be felt in other areas of the economy and begin a deflation cycle.

The salient point is that Old Dominion’s cash flow appears safe, which is good news for capital returns. The company pays its dividend and compounds the 0.5% yield with share repurchase. The company also bought back $1.3 billion in shares during F22 and is on track to continue buying back shares in 2023. The $1.3 billion used to buy back shares in 2022 is worth about 3.5% of the market, with shares trading at $355. 

A glance at capital use may raise a red flag for the dividend, but that is quickly mitigated by the company’s use of debt and balance sheet. The company spent more on CAPEX, dividends and share repurchases than it made in 2022, resulting in a decline in cash on the balance sheet.

You might think ODFL was using debt to fuel these payments, but you would be wrong. The company’s debt also came down during the year and has a leverage ratio at the fortress level of 0.02X. The takeaway here is that ODFL may lean into debt in 2023, and it may not, if it does, it’s not a problem, but either way, it may lead to fewer share repurchases over time. The dividend, however, should continue to grow and offset the difference. 

The Technical Outlook: ODFL Is Moving On Up 

The price action in ODFL gapped up strongly on the daily chart to set a new 13-month high. The GAP may pose a problem in the near term, the market may try and close it, but the weekly signal is very strong.

Assuming the market can close at or near the high of the week where it is now, this stock should move up to the $355 to $360 level. This level may cap gains, but there is a chance the market will move higher.

In this scenario, ODFL shares' price may increase by as much as $100 to the $450 level over the next year or so. If not, ODFL will remain locked in its current range.