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Heartland Express (HTLD) |
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WIKI ANALYSIS
Heartland Express (NASDAQ:HTLD) is a trucking firm that ships appliances, automotive parts, and retail goods. As a truckload carrier, Heartland contracts an entire trailer-load to a single customer, as opposed to less-than-truckload firms who consolidate freight from several customers in one trailer-load. Unlike competitors who offer an array of trucking services, Heartland focuses exclusively on the short-to-medium haul dry van market (meaning contents are mainly non-perishable), with an average haul length of just over 500 miles. This arrangement lets Heartland use mostly single, rather than team drivers, and reduces the need for intermediate equipment changes. In addition, shorter routes mean more regular maintenance checkups and fewer breakdowns. Heartland’s management focuses on minimizing costs through the efficient use of late model equipment (e.g. maintaining a high tractor to trailer ratio, which makes it easier to reposition trailers for loading and unloading, reducing waiting time). Maintaining newer equipment ensures less breakdowns and delays. Its trailers have an average age of 5.6 years[1] (most trailers in the industry are kept for ten to twelve years). The intrinsic advantages of this niche market and Heartland’s emphasis on cost reduction have helped the company generate one of the highest operating margins and returns on invested capital in the industry. The company earned $460 million in revenue and $57 million in net income in 2009.[2]
Despite this focus on reducing expenses, Heartland also pays its drivers one of the highest rates in the industry. This no doubt partly explains why Heartland’s driver turnover rate is 40% lower than the industry average, a significant advantage at a time when truckers face a shortage of drivers. High wages also ensure that Heartland can attract the kind of experienced drivers it needs to deliver a consistently high level of service.
As a transportation company, Heartland’s earnings are closely tied to the overall health of the economy. The company’s primary customers are in retail and manufacturing, two cyclical industries. Another concern is rising fuel prices.
Company Overview
Heartland’s business operations focus exclusively on the short-to-medium haul dry van market, mostly in the eastern half of the country. The company’s eleven regional terminals account for 73% of revenue, while its corporate headquarters in North Liberty, Iowa accounted for the remaining 27%.[3] The advantages of the short-to-medium haul market and Heartland’s emphasis on cost reduction have helped the company generate one of the highest operating margins in the industry, averaging 20.3%. The company’s 80% average operating ratio is also one of the best of any truckload carrier.
Business Growth
FY 2009 (ended December 31, 2009)[2]
- Net revenue fell 26.5% to $460 million due to a 17.6% decline in line haul revenue and a 59.3% decline in fuel surcharge revenue (the revenue that the company passes down to consumers for fuel costs). Number of miles driven and average freight rates also declined during the period.
- Net income fell 18.6% to $57 million despite a 49% decline in fuel expenses due to lower prices and fewer miles driven.
Trends and Forces
Heartland’s Business is Susceptible to Economic Conditions
As a transportation company, Heartland relies on a healthy economy to keep goods moving about the country. The company’s primary customers are in retail and manufacturing, two cyclical industries. A slowing economy and low consumer demand will cause a total volume drop in shipments that can hurt Heartland’s earnings. Additionally, many customers use a bidding system, which tends to keep prices fairly competitive. For instance, when Wal-Mart Stores (WMT) needs freight shipped, it asks several shipping firms to submit how much payment they are willing to accept. The lowest bid usually wins the contract. When shipping volume decreases in a weakening economy, small competitors bid down prices in order to win loads so that they can cover the cost of their tractors. In 2009 the company's net revenue fell 26% partly due to decreased freight demand.[2]
Heartland Somewhat Protected Increasing Fuel Prices
Heartland, along with its peers in the trucking industry, are relatively shielded from changes in fuel prices, because of a generally accepted fuel surcharge system, in which customers agree to pay established shipping rates plus or minus a change in diesel prices. However, if diesel prices continue to increase, it may be harder for the trucking industry to continue its practice of applying the expense to their customers.
Strict Government Regulations Increases Heartland's Expenses
Heartland must follow regulations set forth by the US Department of Transportation and Homeland Security, along with the Environmental Protection Agency (EPA). Heartland ships some goods with a guarantee on shipping time. Further restrictions on the industry could potentially disrupt their shipping times and negatively effect business relationships, and the U.S. government's continued response to terrorist threats could lead to more restrictions and guidelines for the transportation industry. In addition, the EPA requires a progressive decrease in diesel truck emissions through 2010 due to environmental concerns. These regulations could lead to higher fuel, trucks, and maintenance expenses. Hours-on-service (HOS) laws govern interstate trucking and regulate the number of hours a truck driver can work. The U.S. Federal Motor Carrier Safety Administration says a worker cannot drive more than 11 hours after being off-duty for 10 hours. Also, a commercial motor vehicle (CMV) driver cannot exceed 60/70 hours in a 7/8 day period.
Competition
Heartland competes with a range of regional and national transportation and logistics companies. The trucking industry is highly fragmented because of low barriers to entry. There are roughly 360,000 trucking companies (96% operate fewer than 28 tractors and 82% operate fewer than 6). Heartland's most direct competition is with Knight Transportation (KNX), a truckload carrier that also operates in the short-to-medium haul dry van market. Other key competitors in the truckload segment include:
Heartland also competes with numerous less-than-truckload firms who consolidate cargo from several different customers in one trailer-load. They include:
- Conway Inc (CNW)
- YRC Worldwide (YRCW)
- Landstar System (LSTR)
- Arkansas Best (ABFS)
- Saia (SAIA)
- Vitran (VTNC)
- Old Dominion Freight Line (ODFL)
References
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