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Tuesday, July 11, 2006

Reuters Screen Likes Landstar for Long Haul

By William Trent, CFA of Stock Market Beat

Watch List company Landstar System (LSTR) has long been one of our favorite companies. As a trucking company without any trucks (it uses technology to match the loads it sources with drivers who provide their own rig) it is able to weather the ebbs and flows of the transportation industry with less volatility than the typical trucker. This has, in turn, earned the company a higher P/E multiple.
Ideas & Screening

Our capital-asset pricing model indicates that, given the stock’s beta of 0.61 and price-to-earnings ratio of 21.7, an investor in LSTR today would need to see a 9.0 percent annualized, per-share earnings growth rate to break even after five years. Seven analysts offer a long-term earnings-per-share growth estimate. The average is 13.6 percent. Since 13.6 percent is higher than 9.0 percent, LSTR looks good at first blush.

When we’re investing for value, though, we like to look at the most bearish estimate possible. If the most pessimistic view still results in an undervaluation, that’s an excellent sign. In this case, the most bearish long-term EPS growth projection is for 7.2 percent growth. On its surface a growth estimate that is about half of the consensus isn’t all that unusual. Increasingly, there are many companies that give no guidance, and as a result the spread among analyst estimates is wide. But 7.2 is less than our required growth rate of 9.0 percent, and therefore brings into question our initial bullishness.

The low call in this case is from BB&T Capital Markets. While analysts John L. Barnes and Adam R. Thalhimer do have a hold rating on LSTR, it would be inaccurate to describe them as “bearish.” Look at this section heading from their May 26 report, for instance: “Still in awe of the LSTR model.” The hold rating seems, instead, to reflect flat price performance since late 2005 that stems, in their opinion, from investor concerns with tough comparisons in the second half of 2006 and “the future of its exclusive contract with the Department of Transportation for disaster-relief assistance, which is currently set to expire after 2006.”

Our take: With the P/E currently slightly above the long-term average there is some risk to buying Landstar now. Plus, Barnes and Thalhimer are correct that there are special risks this year given the huge compensation from disaster relief work last year and the risk of losing the contract when it expires. Still, over the long haul it has a superior model and a wide moat. While there could be better buying opportunities it is also possible there won’t be. So be aware of the risks as well as the rewards and you should do fine.

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