This Stock-Split Stock Is Up 269% Over the Past 5 Years. Here's Why It's a Buy Today.

Motor carrier Old Dominion Freight Line (ODFL -1.64%) has quietly put together a remarkable run. Shares in its stock have increased over 13,000% since 2003 on a split-adjusted basis. Stock splits have been an important aspect of Old Dominion's rise. The company has split its shares five times since 2003. Most recently, shares were split 2-for-1 in March 2024.

While stock splits are often celebrated, since they tend to come on the heels of large increases in a company's stock price, it's important to remember that stock splits don't meaningfully alter the fundamentals of a stock investment. By increasing the number of shares, the stock price is reduced in the same ratio, and all of a company's per-share performance metrics are also reduced. A shareholder is no better, or worse, off after a stock split than just prior to the transaction. In the case of Old Dominion, the stock split is a bit of a distraction from the fundamentals of the company, which are very strong.

Old Dominion is comparatively undervalued

It can seem strange to say that a company is undervalued when shares in its stock are up over 250% in the last five years. However, valuation can be relative, so when assessing the trucking company for investment, it's useful to compare Old Dominion to its competition. Although smaller in market capitalization, Saia, Inc. (SAIA -3.35%) is another successful, growing, mid-sized, less-than-truckload shipping solution. Saia has also had an impressive bull run, increasing over 600% since March 2020.

Data source: YCharts. Dividends are for the trailing 12 months.

It must be acknowledged that Saia has grown revenue faster than Old Dominion in the past year. However, investors must not only consider the revenue and earnings of companies, but also the current price level and potential value in a stock prior to investing; the price at which investors buy shares matters. While Old Dominion's price-to-earnings ratio can't be called low, it is lower than Saia's, and Old Dominion's price-to-free cash flow per share is substantially lower. This fact demonstrates that each dollar invested in Old Dominion buys more free cash flow in comparison to Saia. With lower price to earnings and free cash flow per-share, Old Dominion is the better-valued company at current share prices, since investors are participating in a much greater cash flow yield; they can hold shares for the long term, anticipating the stock market to reward Old Dominion's shares over time.

The bullish case for Old Dominion

Old Dominion has an enviable balance sheet, with minuscule debt. The company pays a dividend, having increased its payment at the end of 2023, although it's worth noting that the dividend currently yields only 0.53%, even after the increase. However, the dividend is easily supported, with a dividend coverage ratio of 6.6. The dividend coverage ratio shows that for every dollar paid in dividends, Old Dominion earns over six dollars in net income; in other words, the company can easily afford to pay this dividend. Another way to look at it is that Old Dominion is currently paying out only 15% of its net income. The stellar coverage ratio and conservative payout ratio, combined with the company's strong free cash flow, leaves plenty of room for potential future dividend increases.

In addition to the dividends, which competitor Saia doesn't pay, Old Dominion has also been regularly repurchasing shares. This improves its per-share earnings and operational metrics, which can in turn make shares more attractive to own.

Old Dominion is a strong choice for investors looking for opportunities to capitalize on the move to shorten supply chains by manufacturing more goods in America. Even in a post-COVID-19 world, supply chain disruptions are still fresh on corporate minds, and Old Dominion is a proven partner to manufacturers shipping products all over the country.

Old Dominion is a way to bet on continued economic growth

Unusually for an industrials company, you could think of Old Dominion as a contrarian play in the current environment. Over the past 18 months, the U.S. economy was widely expected to slow down, perhaps to enter recession.  Despite the negative outlook, shares in Old Dominion have held up fairly well, down 3% over the past year  even with the Federal Reserve persisting with higher interest rates for longer than most forecasters projected. This period of relative under-performance is an opportunity to purchase shares of a profitable, cash-generating company in a vital industry, at a discount. With the Federal Reserve expected to move quickly to support the economy at the first sign of an economic slowdown, owning shares in Old Dominion can positively expose you to resilience in the economy.

Buying shares at these levels, in spite of the multi-year run-up, can be viewed as a bet on continued strength in the American economy. Old Dominion's current balance sheet strength, cash flow, and potential for dividend increases make its shares a buy for those investors who are positive about the American economy.