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Founded by Russell A. Gerdin in 1978 and listed in November 1986, Heartland Express, Inc. (NASDAQ:HTLD) is a short-to-medium haul truckload carrier with corporate headquarters in North Liberty, Iowa. HTLD provides regional dry van truckload services through its regional terminals and its corporate headquarters. It transports freight for major shippers and generally earns revenue based on the number of miles per load delivered. Its primary traffic lanes are between customer locations east of the Rocky Mountains. During 2005, HTLD expanded to the Western United States with the opening of a terminal in Phoenix, Arizona and complemented this expansion into the Western United States with the purchase of a terminal location near Dallas, Texas during 2008. These western operations accounted for approximately 15% of HTLD's business in 2011.

Executive Summary

HTLD's valuation at EV/EBITDA of 5.66 is low, relative to the five-year average net margins of 12.4% and ROE of 18.4%, respectively. It has a strong balance sheet in the form of a net cash balance of $212.7 million representing 19% of its current market capitalization and it also generated positive free cash flow in nine out of the last ten years. HTLD is committed to returning excess capital to its shareholders, with 3.9 million shares remaining under its current repurchase program and special dividends in 2012, 2010 and 2007. HTLD has one of the best operating margins, the newest fleet and the best Compliance-Safety-Accountability scores in the industry. The interests of its employee drivers and independent contractors are strongly aligned with that of the company due to the implementation of an equitable compensation policy.

Business Quality

HTLD maintains one of the newest fleets in the industry, with the average age of its tractor fleet and trailer fleet at 2.4 years and 3.3 years, respectively. Its tractor fleet currently consists of 2010 models and newer, and is one of the newest fleets in the industry; while its trailer fleet will consist of 2007 models and newer by the end of the year, after beginning to take delivery of 1,000 new Wabash trailers in the fourth quarter of 2012. This allows HTLD to have the best Compliance-Safety-Accountability scores in the industry and helps it in the execution of its award winning customer service and the hiring and retention of drivers.

The compensation policy introduced by the management of HTLD aligns the interests of its employee drivers and independent contractors closely with that of the company. All drivers are generally compensated on the basis of miles driven including empty miles, and are not penalized for inefficiencies of operations beyond their control. In addition, HTLD adopts a stringent hiring policy, by targeting only drivers with at least one year of over-the-road experience. It minimizes safety problems with drivers through careful screening, mandatory drug testing, continuous training, and financial rewards for accident-free driving.

HTLD continues to achieve industry leading operating margins in this challenging truckload environment, delivering an operating ratio of 82.1% and a net margin of 12.4% over the past five years. It ended 2011 with an operating ratio of 79.8% and a 13.2% net margin, its best results in the past five years. As at Dec. 31, 2012, HTLD has achieved eight consecutive quarters of year-over-year growth in gross revenues, and its 2011 earnings per share is the highest since 2007.

Valuation and Financial Analysis

HTLD is currently trading at a trailing twelve months P/E of 17.33 and a trailing twelve months EV/EBITDA of 5.66. In terms of asset-based valuation, it is currently valued at 2.95x P/B, a 26% discount to its five-year average P/B of 3.97. HTLD achieved a ROE of 17.8% for the past twelve months and a five-year average ROE of 18.4%. HTLD has been profitable for every year in the past decade and is free cash flow positive in nine out of the last ten years. Free cash flow was only negative in 2011 due to a significant amount of capex spent on the upgrade of its tractor and trailer fleet. Management has grown revenue and EPS by a ten-year CAGR of 6.0% and 7.6%, respectively. HTLD is debt-free with net cash of $212.7 million representing 19% of its current market capitalization of $1.1 billion.

Capital Allocation

HTLD has paid dividends in every single year since 2003 and sports a current dividend yield of 0.6% (excluding special dividends). It has also paid special dividends of $1.00, $1.00 and $2.00 per share in 2012, 2010 and 2007, respectively.

HTLD has paid approximately $153 million to repurchase 11.5 million shares through stock repurchases over the past five years. As of September 30, 2012, it had 3.9 million shares remaining under its current repurchase program, equivalent to approximately 4.5% of shares outstanding.

Investment Risks

HTLD's operations are heavily dependent upon diesel fuel, and significant increases in diesel fuel costs could adversely affect its business operations and financial results. Historically, HTLD has sought to recover a portion of increases in fuel prices from customers through fuel surcharges. However, fuel surcharge revenues lag in periods of steadily rising fuel prices, and the negative impact is amplified when fuel prices increase at a faster pace. Furthermore, fuel surcharge agreements do not cover fuel consumed in non-customer driven miles and fuel consumed by idling tractors. Its third quarter fuel expense and net fuel cost per mile increased 3.6% and 11.0% year-on-year, respectively.

HTLD's biggest challenge is the recruitment and retention of safe and experienced drivers. Like its peers, HTLD downsized during the recent recession and is now trying to increase the number of drivers to its pre-recession size. Competition for drivers, which is always intense, may intensify even more with the increase in overall demand for freight services and increased regulation. HTLD is responding to the challenge by directing resources to its driver recruiting department and retooling the recruiting process.

HTLD's top 25, 10, and 5 largest customers accounted for 74.9%, 51.6%, and 38.0% of its 2011 gross revenue, respectively, and its primary customers include retailers and manufacturers.

Source: Heartland Express: 6x EV/EBITDA With A Debt-Free ROE Of 18%