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Heartland Express (HTLD)Stock (Transportation Industry, Trucking Industry)
 Heartland Express (HTLD) is a trucking firm that ships appliances, automotive parts, and retail goods. As a truckload carrier, HTLD 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 512 miles[1]. This arrangement lets HTLD use mostly single, rather than team drivers, and reduces the need for intermediate equipment changes[1]. In addition, shorter routes mean more regular maintenance checkups and fewer breakdowns. HTLD’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)[2]. Maintaining newer equipment ensures less breakdowns and delays. At the end of 2007, the oldest tractor in Heartland’s fleet was a 2005 model[3], and its trailers had an average age of 3.8 years (most trailers in the industry are kept for ten to twelve years)[2]. 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[4]. Despite this focus on reducing expenses, Heartland also pays its drivers one of the highest rates in the industry[2]. This no doubt partly explains why HTLD’s driver turnover rate is 40% lower than the industry average, a significant advantage at a time when truckers face a shortage of drivers[3]. 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[1]. Another concern is rising fuel prices. After accounting for fuel surcharge recoveries, HTLD’s fuel costs increased 18% from 2006 to 2007[2].
[edit] Business FinancialsHeartland’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 eight regional terminals accounted for 65% of revenue in 2007, while its corporate headquarters in North Liberty, Iowa accounted for the remaining 35%[2]. 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% from 2003 to 2007[5]. The company’s 80% average operating ratio during that same time is also one of the best of any truckload carrier[5]. And from 1997 to 2007, the firm generated an average return on invested capital of 35.4%, triple its cost of capital[5]. Revenues totaled $592M in 2007, a 3.5% increase from 2006[5]. In the same period, net income decreased 12.6% to $76.2M[5]. A weak economy and record fuel prices weighed on the firm’s margins. HTLD’s fuel costs rose 12.3% from $146M in 2006 to $164M in 2007[5]. After accounting for fuel surcharge recoveries, fuel expense increased 18% to $81.9M in 2007 compared to $69.5M in 2006[2].   [edit] Trends and Forces[edit] Heartland’s Business is Susceptible to Economic ConditionsAs 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[1]. 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. [edit] Heartland’s Costs Are Affected By Fuel PricesSince 2004, diesel prices have more than tripled from $1.50 per gallon to $4.72 per gallon in May 2008 [6]. Like most of its competitors in the transportation industry, Heartland determines shipping rates by charging a base rate plus or minus a change in diesel prices. However, this fuel surcharge is not always fully and immediately transferable to the customer. For instance, fuel consumed when trucks are empty, off-route, or idling are not recoverable. Heartland’s fuel costs rose 12.3% from $146M in 2006 to $164M in 2007[5]. After accounting for fuel surcharge recoveries, the firm’s fuel expense increased 18% to $81.9M in 2007 compared to $69.5M in 2006[2]. [edit] New Government Regulations Increase HTLD’s Operating CostsThe transportation industry is subject to a number of state and federal rules on issues such as insurance requirements, environmental standards, safety requirements, etc. In 2004, the Department of Transportation reduced the amount of time that drivers can spend behind the wheel[7]. And in 2002, the Environmental Protection Agency instituted new guidelines designed to reduce diesel truck emissions by 2010[8]. The latest stage in this process came into effect January 2007, after which all newly manufactured truck engines have to comply with a set of more restrictive engine emission requirements[9]. Trucks manufactured with the new engines have a purchasing price ~$5,000 to $10,000 higher than older models, are less fuel-efficient, and have higher maintenance costs[10]. In December of 2006, HTLD completed a fleet upgrade of tractors with pre-2007 engine standards[11]. This will let the firm postpone the purchase of trucks with the pricier 2007-standard engines for a couple of years. [edit] Heartland’s High Wages Partly Shield it From Labor Supply RisksThe driver market is the tightest it has been in 20 years, with turnover rate exceeding 100% in some large trucking companies[12]. According to the American Trucking Association, the trucking industry faced a national shortage of 20,000 drivers in 2007, a number that will swell to 111,000 by 2014[12]. In such an environment, Heartland’s industry leading wages help it to attract the kind of experienced and well-qualified drivers the firm needs to deliver premium on-time service[2]. It also partly explains why HTLD’s driver turnover rate is 40% lower than the industry average[3]. 33% of HTLD’s revenue in 2007 went to salaries and benefits for its 3,291 employees[5], compared to 28% at Knight Transportation (KNX) for its 4,404 employees (also a short-to-medium haul trucking firm)[13]. Beyond wages, Heartland’s business model makes for happier drivers. Its focus on local and regional trucking means shorter routes and higher job satisfaction, and its regional terminal approach lets drivers stay closer to their families[3]. [edit] 10 customers account for 50% of HTLD's revenuesHeartland’s top 10 customers accounted for 50% of 2007 revenue (the firm’s largest client accounted for 13%), so customer concentration risks exist for HTLD[1]. The loss of a major client will have a significant impact on the company's balance sheet. [edit] Competition and Market ShareHeartland 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) [14]. HTLD'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:
Market share figures assume trucking industry revenue of $357.7B in 2006[15]. Several of the listed companies earn a portion of revenues outside of transporting goods, such as warehousing and logistics. These instances usually account for less than 10% of the total sales. Note: A parenthesis around the figure indicates a negative number, i.e. (5.4%) is a decrease of 5.4%.
 Heartland Express2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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