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Introduction

         Landstar System (LSTR) is a $2.20 billion company in the trucking industry. Market capitalization competitors in this industry include YRC Worldwide, Con-Way Inc, and JB Hunt Transport. The trucking industry is down 85% over the past year compared to the S&P 500 which is up 9.5% during the same period. Over the past month the industry has been down 8.31%, while the S&P 500 has been down 2.50%. After a strong sell-off earlier this year, there is a strong potential for trucking companies to grow. Evidence comes from the supposed oil price peak. Landstar's growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

         This section describes what Landstar produces. According to Reuters, Landstar provides "transportation capacity and related transportation services to shippers throughout the United States." The company's "business services are delivered through a network of independent commission sales agents and third-party capacity providers linked together by a series of technological applications." Customers "include the United States Department of Defense and the United States Department of Transportation/Federal Aviation Administration." The US government helps Landstar with nearly 9% of revenues.

         The company is further divided into three segments: carrier, global logistics, and insurance. The carrier segment "provides transportation services to the truckload market for a range of general commodities." With over 8500 tractors transporting goods over the United States and Canada, a significant portion of revenue comes from this segment.

         The next segment, global logistics, serves to "include the arrangement of multimodal (ground, air, ocean and rail) moves, contract logistics, truck brokerage, emergency and expedited ground, air and ocean freight, bus brokerage and warehousing." Over 400 trucks are involved in this segment, which provides significant help to disaster relief effort connected with the government. The last segment, insurance, provides risk and claims management services to Landstar's operating subsidiaries." Overall, Landstar has an array of activities that has helped the company grow and benefit shareholders over the past 14 years.

Growth

         Landstar is growing at a solid and sustained rate. Revenue, according to Reuters, was $2.52 billion the past fiscal year. Despite the high number, many investors may condemn the terrible 9.04% decrease in revenues from the previous year. However, this downtrend was evident throughout the industry. YRC fell 3.14%, Con-way fell 2.58%, and JB Hunt only grew a meager 1.85%. In addition, earnings were not great for Landstar at a negative 8.55%. Nevertheless, earnings growth was also negative for the industry at 6.92%. Competitor YRC saw earnings drop to 52.69% and rival Con-way saw earnings drop 8.74%. The trucking industry had a terrible 2007. Higher gas prices were the biggest detriment. Now that prices are near $95 dollars a barrel, some investors may question buying these types of stocks in such a commodity-dependent industry. However, there is evidence that oil prices are over exaggerated now. Once foreign nations start to show slowdown in growth, the American currency will appreciate from its lows, oil will be less demanded, and prices will fall. Now may the perfect chance to invest in this industry, especially with a strong company like Landstar. Despite the past fiscal year, Landstar still has a five year revenue average of 12.52%--a number above the industry and competitors JB Hunt and Con-way. In addition, Landstar's five year average earnings growth of 25.23% is also quite high compared to competitors like Con-way, which does not show strong earnings potential given its negative revenue five year average of 2.79%. Therefore, there is a strong potential for Landstar to rebound in the next couple of months given the company's past history.

         Moreover, margins support this assessment. While the major margins (gross, operating, and net profit) are below the industry average and most competitors, growth is still a factor. It's true that gross margins fell from the company's five year average of 15.01% to 14.41% according to Reuters, but the industry also fell in terms of gross margin from 24.01% to 21.94%. What's good about Landstar's margins can be attributed to its operating margins which rose from its five year average of 6.56% to 7.50%. In addition, net profit margin for Landstar grew from the company's five year average of 3.90% to 4.44%. Continued cost-cutting coupled with better revenue figures in the future will be beneficial to even further increase Landstar's margins.

         The most important fundamental statistic to look at when examining Landstar is the company's ROE. The company's five year average ROE of 42.45% was already impressive, but considering poor revenue and earnings growth over the past fiscal year, Landstar still managed to increase the company's ROE to 49.48. This number is significantly greater than the industry average of 23.47%. The number is also greater than competitor's Con-way (24.87%) and JB Hunt (40.78%). Landstar's ROA of 16.68% and Landstar's ROI of 28.14% are also both higher than the respective industry averages of 10.35% and 13.99%.

Valuation

         Given Landstar's high ROE, there is obviously a lot of optimism regarding this stock. In this condition, it is clear that the company may be over priced compared to the industry. Currently, the trucking industry has earnings multiple of 16.14 and a price to sales ration of 1.01. Landstar's future respective multiples stand at 21.67 and 0.93. These numbers are higher than the industry average, but for good reason. Investors realize that there is strong potential for growth in Landstar and are paying the premium now to receive high gains in the future. Several indications support this argument including a high ROE and increasing margins. Once oil prices fall and the trucking industry regains steam, Landstar will have tremendous potential for share price growth.

Efficiency

         Landstar is fairly efficient. The company's receivable turnover of 7.36 is comparable to the industry at 9.09. This means every 50 days, Landstar receives cash for selling goods. Asset turnover at 3.76 is actually higher than the industry's 1.94 figure. This number means that Landstar makes good use of buying and selling its assets to generate revenue. Moreover, Landstar has more than enough assets to cover its liabilities. The most recent current ratio of 1.66 illustrates the company's solvency. The company's debt to equity ratio of 0.80 is also supportive of the option of liquidity. Some investors may question no risk equals no growth, but there is limits to high potential growth opportunities in this industry.

         Moreover, Landstar provides a generous dividend yield. The company's 0.36% yield is higher than YRC Worldwide, which offers no dividend. Institutional investors have recognized the benefits of Landstar's dividend yield and other fundamentals. Currently, institutions own 95.00% of all Landstar shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability.

Technical Analysis

         Landstar has performed fairly well share-price wise. In 2007 the company's share price is up 7%, despite bearish economic news the second half of the year and huge spikes in oil. The company was down 11% in 2006, but had not experienced a negative calendar year since 1996 before last year. Interestingly, since 2003 up to November 2007, Landstar's share price is up 172% for an annual growth rate of 43%.

         More specific to the current month, Landstar illustrates strong technical signals. The 50 day SMA and 50 day EMA are both linear over the past three months. Parabolic SAR did recently fall below the market price, but a potential outbreak will boast the SAR upwards. The company is a little undervalued compared to the RSI index at 44.45, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Landstar according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

         Landstar is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
November 2nd, 2007