ODFL - An oasis in the trucking desert

Old Dominion Freight Line (ODFL) is a trucking company. They focus on transporting less-than-truckload (LTL) loads for their customers. Their motto is "premium service at a fair price."

First, a look at some numbers:

2005 - 2015 EPS CAGR: 20%
2005 - 2015 Revenue CAGR: 10%
2005 - 2015 Operating Income CAGR: 18%

2005 Debt: 129M
2005 Equity: 345M
2005 Net Income: 53M
2005 Net Margin: 5.7%

2015 Debt: 134M
2015 Equity: 1685M
2015 Net Income: 305M
2015 Net Margin: 10.1%


Management has not given out any dividend or done any significant repurchases or acquisitions in the past 10 years. All growth has been organic. Management are outstanding operators.

The trucking industry is generally very lousy: it is capital-intensive, cyclical and undifferentiated. Profit margins and return on equity is very low.

ODFL is different because it provides a slightly premium product and excellent customer service. It's return on equity has been > 15% for many years.

Capital Allocation Policy

From their 2015 annual report:

We have three priorities for our capital allocation strategy. Our first priority has been, and will continue to be, investing in the organic growth of our business through our ongoing capital expenditures for capacity and technology.
Our second priority will be to continue to evaluate strategic acquisition opportunities in an industry experiencing increasing consolidation pressure. Finally, we remain focused on continuing to return capital to our shareholders through our stock repurchase program in order to increase total returns. 

ODFL 2015 Annual Report

They have not done any acquisitions recently which shows patience and discipline.

Risks

I think this company has key-person(s) risk. Earl Congdon is 84 years old (Chairman) and David Congdon (CEO) is 58 years old. The Congdons own ~15% of the company and are owner-operators. Without an owner-operator at the helm, I fear return on equity will decline significantly.

Another key risk is that of a recession. This company did not fare well in the 2008 recession.

A note on capital intensity

I have noted in the past that I like businesses that are not capital intensive. So why pick this business to study?

It is because this business has a long ramp. Capital-light business are my preferred type of businesses to study and "acquire" in my "conglomerate", but typically those businesses cannot reinvest their income back at high returns. So, although they return most of their cash back to owners, the net income typically does not increase by that much.

If the economy does not hit any bumps, ODFL can reinvest income at 15% returns for a long time (10+ years), given management runs the business well.

Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. 

Warren Buffett, 1992 Shareholder Letter

Visa - A toll road on the world's consumption

Visa is a technology company that acts as a middleman between banks when transactions happen via their cards.

Business Model

When you swipe a visa card, the following happens:

1. The seller's bank takes the buyer's card number, and gives it to Visa.
2. Visa contacts the buyer's bank, checks the account balance and authorizes the payment.

So, by sitting between the seller's and buyer's banks, Visa enables the transaction to take place. In exchange for this, it gets a small fees. And boy, do those small fees add up. In 2015, Visa recorded 7B of income. In 2010, the income was 3B. Per-share income rise was even higher (22% from 2010 to 2015).

Business Stats

2010 - 2015 EPS CAGR: 22%

2010 - 2015 Net Income CAGR: 16%

Net margin in 2015: 50%

CapEx / Net Income in 2015: 7%

This is an extremely capital-light business gushing out lots of cash flow. Bulk of the cash flow goes to the owners, to repurchase shares.

Outlook

Electronic payments account for only 15% of the world's total transaction volume. Cash and check are still prevalent in many parts of the world.

Visa and Mastercard have a lot of room to grow. My suspicion is that both Visa and Mastercard will grow at 10% or so CAGR for at least 10 years. The EPS may grow faster because of share repurchases.

Eventually, it may be a winner-takes-all situation, or an oligopoly. Or perhaps both will be replaced by some other form of electronic payment. I am not smart enough to figure that out.

Summary

Both Visa and Mastercard are amongst the finest businesses in the world. They are like a toll road on the consumption of the world with very low maintenance cost. I would love to own either.