What happened
Shares in less-than-truckload (LTL) trucking company Old Dominion Freight Line (ODFL 1.76%) fell 12% in the week to midday Thursday. In truth, it would be remiss not to point out that most of the transportation sector took a beating this week. The reason?
It comes down to the fear that a recession could be around the corner. If there was one singular event, Target's (TGT -1.42%) first-quarter earnings report was probably it. Target experienced margin pressure due to rising costs, and consumers slowed spending on discretionary items – usually a sign of an impending economic slowdown.
Moreover, a key indicator for the transportation industry – rail traffic data from the Association of American railroads – continues to show rail traffic tracking below 2021 levels.
Image source: Getty Images.
So what
If the economy is slowing, then the transportation industry will too, and that will put pressure on the share price of Old Dominion. As a high-quality operator in the LTL market, the company has grown its profit margin significantly over the last couple of years. LTL simply means trucks are filled with different customers' goods rather than a full truckload (FTL) from one customer. The LTL model served Old Dominion well in the pandemic and the consequent supply chain crisis. It allowed the trucking company to be more selective (higher margin) in its deliveries due to excess demand.
If that means demand is about to drop off, then revenue and margin could follow it downwards.
Now what
There's no shortage of things to worry about from a macroeconomic perspective right now – rising interest rates, soaring cost inflation, ongoing supply chain issues, and the ongoing conflict in Ukraine –causing investor fear over economically sensitive companies like Old Dominion. Still, many of the problems discussed above are solvable and likely to prove temporary. Meanwhile, the correction in the equity markets is undoubtedly creating some decent buying opportunities for investors looking at high-quality companies like Old Dominion.
