I should have known better than to think that valuation was going to be an impediment to further gains with Old Dominion (ODFL), as the shares of this best-in-class less-than-truckload carrier have shot up another 40% since my late April update. Not only has Old Dominion management reported that the company is regaining share, typically marking the start of a cyclical upturn, the business managed further margin improvement despite revenue pressures.
I don’t really know what more I can say about the valuation. The shares trade at a forward PE that is almost four standard deviations above the long-term average, and likewise, well ahead of what would seem to be a reasonable estimate of future free cash flow, margins, and ROIC. While I’ll grant that lower interest rates do mean that valuations should be higher than historical norms and that top-notch companies deserve premiums, I just can’t really wrap my head around this as anything other than a momentum trade.
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