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Friday, July 21, 2006

Falling Landstar

By William Trent, CFA of Sotck Market Beat

Watch List trucking company Landstar System Inc. said second-quarter profit rose 31 percent on gains in its brokerage and intermodal business. Quarterly earnings rose to $29.5 million, or $0.50 per share, compared to $0.37 per share in the year-ago quarter and consensus estimates of $0.47. The results included a cost of $1.9 million, or $0.02 per share, related to the adoption of stock-option expensing.The company additionally declared a quarterly dividend of 3 cents per share, an increase of half a cent from the previous quarter.Landstar said third-quarter earnings should be in the range of $0.45 to $0.50 and expects revenue to grow by 16 percent to 20 percent. This compares to consensus estimates of $0.50, which caused the shares to tumble yesterday.

Given that the guidance for next quarter is only taking back the superior performance from this quarter (beat by $0.03 now, but are guiding to $0.03 below the consensus) was it really rational for the shares to fall? The company is executing well and we heard nothing on the conference call that would suggest things are deteriorating.Could it simply be a high valuation in a sloppy market that is being punished? The current P/E of 21x is slightly above Landstar’s high-teens long-term average but much lower than that of competitors such as Expeditors International (EXPD) at 43x or CH Robinson (CHRW) at 31x. Landstar is growing at a similar pace as CH Robinson but slower than Expeditors.

So, while shares may continue to be weak they appear more reasonably valued than those of its peers and this is a company with great management that continues to deliver strong results. We are tempted to buy some here.

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