Investment Jungle

Bill Trent from Stock Market Beat mentioned in my C.H. Robinson Worldwide Inc post that his favourite non-asset based transportation company was Landstar Systems Inc which trades on the NASDAQ under the symbol LSTR. Bill and I tend to be on the same page often, so let’s have a look at this one and see if we have another Rule #1 company on our hands!

Company Profile:

From Yahoo Finance

Landstar System, Inc. is a non-asset based transportation and logistics services company. The company, through its subsidiaries, provides transportation capacity and related transportation services to shippers in the United States, Canada, between the United States and Canada, Mexico, and internationally. The company operates in three segments: Carrier, Global Logistics, and Insurance.

This company has a market capitalization of $2.77B.

Financial Analysis:

Right off the bat, I am salivating at the return on invested capital that management has delivered. Other than in 1997, management has returned an ROIC of 20%+ each and every year with the ROIC peaking in the last 2 years at 29.4% and 33.2% respectively.

And the return on equity has been even better! With total debt of 35% of capital, management has been able to produce a ROE of 35.49% over 10 years and an even better 38.93% over the last 5 years! And last year’s ROE? An amazing 46.9%!

With all that excitement, the equity growth rate has grounded me. It has not been as impressive and quite volatile. From lows of negative 15% to highs of almost 48%, and just about everything in between. Over the 10 year period, the equity growth rate has been a very respectable 14.69%. Over the last 5 years, it has been an even better 19.65%. And it gets even better over 3 years at 20.36%! Last year, the equity growth rate was a very disappointing negative 4.21%. Is this an aberration?

Earnings per share growth rate exhibits the exact same behaviour as the equity growth rate (which makes sense). Over the 10 year period, the EPS growth rate was 23.4%. Over 5 years, it climbs to 29.32%. And even better at almost 35% over 3 years and last year’s EPS growth rate was negative 2.53%.

And the sales growth rate follows this trend as well! From 8.11% over 10 years to 14.46% over 5 years to negative 0.16% last year.

And dare I say, cash flow growth rate has been in step as well. Yes it has been.

All the Big Five have been absolutely amazing except for 2006. Is that an opportunity to buy a great company? Let’s calculate the sticker price.

Stock Analysis:

LSTR is currently at a historically high P/E of 25.63. However, the most conservative P/E comes from the 10 year average at 15.45. Rule #1 investors always err on the side of caution. So 15.45 will be our future P/E.

For the future EPS growth rate, I used 14.69% as my initial estimate. This is the equity growth rate over the 10 year period and is more conservative than the 5 year and 3 year growth rates.

Analysts have forecast 17.2%. So I am in the same ballpark, but I’ll go with my more conservative estimate.

With these numbers, the sticker price works out to $29.47. At the current price of $50.24, Mr. Market is demanding a premium of 70.46%!

Check my calculations here.

And here is the stock price over the last 3 months

It has definitely been pretty choppy. But what a massive move since June 25th!

Conclusion:

Typically, a Rule #1 investor likes to see the Big Five either holding steady or increasing. Landstar Systems Inc seems to have had a hiccup in 2006. Otherwise, the Big Five look beautiful. However, Mr. Market seems to have this stock priced much too high for a Rule #1 investor. Looking at the yearly chart, the lowest that LSTR has gotten is just under $38 back in December 2006.

What do you think about LSTR?

Full disclosure: I do not own any shares in LSTR.

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