Landstar Systems: Ready To Roll

Wednesday Landstar System, Inc. (LSTR) rose on the back of C.H. Robinson’s (CHRW) positive surprise. Yesterday the stock followed through on Landstar’s own reported net income for the thirteen-week period ended December 30, 2006 of $28.7 million, or $.50 per diluted share, on revenue of $611 million. While this was down from $0.70 in the fourth quarter of 2005, the comparison was difficult due to the fact that Landstar has a disaster-relief contract with the U.S. government that boosted 2005 revenue and earnings in the wake of Katrina and Rita, while (fortunately) no similar disasters happened in 2006. If the disaster relief business is excluded from both years, earnings per share rose from $0.42 in 2005 to $0.47 in 2006 for a double digit gain.

Landstar, which was added to our small- and mid-cap watch lists at yesterday’s closing price, is trading at about 23x last year’s earnings and 21x the estimates for next year even after today’s rally, which is in line with the company’s five-year average and well below the 30’s multiple assigned to CH Robinson, though the latter is both larger and growing a bit faster.

But the big news for Landstar’s valuation could be the very anniversary of significant hurricane revenue that made the current comparison so unfavorable. Because without the overhang, Landstar may now be able to close the multiple gap between itself and its nearest competitors.

Digging a little further into the financials, we were pleased to see a year/year cash accumulation despite real share buybacks (the kind that reduce shares outstanding rather than replace exercised executive options). This was due in part to the company collecting on last year’s accounts receivable from the government, which allowed for significantly more cash to come in than was recorded as 2006 earnings (the earnings were in 2005, ahead of the cash). While the release was not as detailed as would be found in a 10Q, it looks pretty good.

Disclosure: as of January 31, author was short Landstar (LSTR) put options.

LSTR 1-yr chart:

No wonder the stock is rising.