Landstar 'Executing On All Cylinders'; Strength to Carry Through H1 '22

Freight broker Landstar System sees the current tight trucking market continuing in the fourth quarter and into 2022.

The Jacksonville, Florida-based company released record quarterly results Wednesday after the market closed. Earnings per share of $2.58 were 97 cents higher than the year-ago period, 18 cents higher than the second quarter, and ahead of management's mid-August guidance raise calling for a range of $2.45 to $2.55.

Landstar LSTR issued fourth-quarter guidance for revenue to be in a range of $1.7 billion to $1.75 billion (33% higher year-over-year) and EPS to be between $2.55 and $2.65 (53% higher year-over-year and ahead of the current consensus estimate of $2.48).

"In our view, the overall environment for Landstar continues to be as strong as it has been at any point over the last two decades and Landstar is positioned to complete the year with tremendous success," Jim Gattoni, president and CEO, told analysts on a Thursday call.

The fourth-quarter expectation calls for loads hauled by truck to increase between 13% and 16% year-over-year with revenue per load up by 15% to 18%.

Achieving the new guidance would push full-year revenue to more than $6 billion and EPS above $9.55, both of which would be annual records. With one quarter remaining in 2021, Landstar's year-to-date revenue is equal to the full-year revenue recorded in 2018. Operating income is already higher on the same comparison.  

Earnings growth in 2022 after record 2021?

On whether earnings growth can be achieved again in 2022 following a record performance this year, management said they weren't ready to commit to an answer yet.

Gattoni said he's "feeling pretty good for the first half."

"We were saying that sometime first half we might see it start to cycle back. Now we're thinking maybe it's more toward the end of the first half because things still remain very strong coming into the fourth quarter. We don't see anything pulling back. We see no metrics of trucks coming into the system or demand slowing down," he said. 

While Gattoni doesn't expect the market to continue to step higher, he doesn't believe pricing will retreat.

"The costs that are now in the industry, whether it's driver wages or insurance and things like that, the costs are elevated. I don't think you're ever going to pull back to where we were back in '16, '17."

The selling, general and administrative expense line will likely see a tailwind next year.

Landstar will pay out incentive compensation of $30 million to $35 million this year, which won't be the case next year "unless we blow it out again," according to Gattoni. The expected cushion should more than offset a 5% pay increase to employees (roughly $4 million to $5 million) and increases to headcount (potentially a similar amount).

The new additions will mostly be transaction processing jobs to accommodate the record volume growth.

"I think we can grow earnings, but I don't want to put a commitment to that," Gattoni said. "It's very unpredictable right now sitting here and trying to look into the next 12 to 18 months and what the market is going to look like."

He noted the comps will be tough but if the market only retreats by 10%, Landstar could grow EPS again. A 20% to 30% pullback, a level not anticipated by Gattoni, would take earnings growth off the table.

Third-quarter results

Consolidated revenue increased 60% year-over-year to $1.73 billion, with revenue from dry van loads up by a similar percentage to $918 million.

Total truckloads increased sequentially by 3.5% (up 22% year-over-year), the second-highest percentage change from second to third quarters since last year, which included a volume surge as COVID-related shutdowns were lifted.

Dry van loads were 21% higher year-over-year, with revenue per load increasing 31% to $2,556 (8% higher than the second quarter).

Trucks provided by business capacity owners increased 11% year-over-year to 11,746 units. Total truck capacity providers on the platform increased 29% year-over-year and 6% sequentially to nearly 95,000.

Variable contribution, or revenue less purchased transportation and agent commissions, was $242 million, a new record. The variable contribution margin slipped 85 basis points to 14% as the cost of truck capacity stepped higher. Purchased transportation expense increased by 100 bps year-over-year as a percentage of revenue but remained level with the second quarter.

Gross profit margin, which Landstar's definition now includes variable costs of revenue beyond purchased transportation and agent commissions (like trailer depreciation and maintenance expenses as well as IT and insurance-related costs) slid 10 bps year-over-year to 10.9%.

Operating margin, or operating income as a percentage of variable contribution, increased more than 300 bps to 54.2%.

Table: Landstar's key performance indicators

What to do with all that cash?

Net cash was level year-over-year at $170 million. The company has generated nearly $200 million in free cash flow this year.  

"We have way more cash than we need to run the business," said CFO Fred Pensotti.

Landstar has already paid $102 million in dividends and repurchased $50 million in stock so far in 2021. Pensotti would like to place more focus on share buybacks versus special dividends going forward. He threw out acquisitions as a potential cash use but noted that Landstar hasn't been all that active in M&A recently.

Gattoni concluded, "Landstar's performance so far this year has been outstanding. The company's agent family is executing on all cylinders and we continue to add qualified truck capacity. We ended the 2021 third quarter with a record number of trucks provided by BCOs and a record active third-party truck brokerage carrier count."

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