A couple of weeks ago I was afforded a rare opportunity to buy one of my favorite stocks, Landstar (LSTR – Annual Report), at what I considered to be a bargain basement price. As I said at the time:

Over the last 12 months, Landstar generated $167 million in free cash flow. Nearly all of its operating cash goes to share repurchases and dividends since the company isn’t buying trucks. On a $2.1 billion enterprise value, that amounts to an 8% free cash flow yield – more than twice the yield on Treasury bonds and a healthy risk premium in today’s market.

What’s more, Landstar’s 5% apples-to-apples growth in a bad year suggests the longer-term growth rate could be significantly higher. With today’s price justified even without any growth, the prospect of an eventual return to double-digit growth rates gets my mouth watering.

I was prepared to wait a while before earning significant returns, but Landstar got me a good way along during its mid-quarter conference call yesterday.

Landstar affirms 4th-quarter profit view (Reuters):

Chief Executive Henry Gerkens said on a conference call he was “very comfortable” with the company’s October forecast, which calls for earnings-per-share in a range of 47 cents to 52 cents.Analysts, on average, were looking for Landstar to earn 49 cents per share on sales of $624 million, according to Reuters Estimates.

The shares were up more than 5% after the call, but it will be a while before I am ready to sell. Even after yesterday’s rally the shares are yielding 7.1% free cash flow-to-enterprise value. With the 5-year Treasury at 3.4%, that still amounts to more than a 100% premium, and Landstar should still provide growth.

In fact, I would be willing to own Landstar up to a parity yield with Treasuries, because I think the growth alone is sufficient premium for the risk. On that basis, and with today’s Treasury yield and trailing Landstar FCF, I get an implied value of nearly $90 per share. Obviously both variables could change over time, and a fall in Landstar’s free cash flow or a rise in interest rates would indicate a lower possible value. But at any rate, I feel like I have quite a margin of safety.

Last 5 posts by William Trent

• Capacity Utilization - August 16th, 2009
• Corporate Profits - July 12th, 2009
• Capacity Utilization - April 18th, 2009
• Another Record: Capacity Utilization - April 2nd, 2009
• Record Territory - March 27th, 2009