Here’s an idea I’ve been thinking about this week: the scarcity of industrial land near big markets. It’s getting harder and harder in the US to find land to build things like service centers for trucks, used car lots, warehouses and the like.
Ergo, the companies that have consistently invested in land over the years have a massive advantage over those who have not…
I have two examples that show what I mean: Old Dominion Freight Lines (ODFL, which we don’t own - yet) and Copart (CPRT, which we do).
Old Dominion Freight Lines (ODFL)
I had a great conversation with Tony Slater, the Treasurer at ODFL, a couple of weeks ago. What he told me got me thinking.
So, ODFL is in the trucking business, specifically LTL (less-than-truckload). I admire this business and wrote about it before here. Anyway, this business requires a network of service centers near your customers, where you can load/unload and sort pallets for delivery.
Over many years, ODFL has invested heavily in land to build service centers - $1.5 billion since 2010. Real estate is roughly half of their capital expenditures. They lease very little, because they take the long view.
Leasing would expose them to all kinds of uncertainty. For example, at what price would they be able to renew the lease? They don’t want to see an Amazon move in the neighborhood and see rents go up. So they buy land and control their own destiny. And they buy more than they need -- so they can expand later and it is not expensive to do so.
The key is having the land in the right places, to improve the network. And this is one reason ODFL has taken market share from its competitors. Their competitors did not invest in their own networks. They leased space or cut investments during down cycles - while ODFL kept investing.
This is a business where failure to deliver is not an option. You can cost your customer sales by not getting the goods where they need to be, on time. And you can’t do that if you don’t have the capacity in your network to move the freight efficiently.
As Slater told me, if you’re growing 20% in a year, that takes a lot of real estate. You need to invest 2-3 years in advance.
So, think of it… years and years of ODFL acquiring real estate. Competitors can’t replicate it today. In Chicago and in California, two markets Slater mentioned, it is very very tough to get land, permitting and zoning… and it’s getting more expensive each year.
Here’s another interesting tidbit on how valuable land is: ODFL is unlikely to do an acquisition. They haven’t done one since 2008. They prefer to grow organically, where they can put their unique cultural imprint on the place. But if they do an acquisition, it would probably be for the real estate, not the business they acquire. That tells all you need to know right there.
The land holdings partly explain why ODFL’s performance metrics are so much better than rivals. Returns on capital have been rising, too. And they are taking market share.
Copart (CPRT)
Copart is another interesting example. Copart runs a virtual auction market for cars that have been totaled, basically. You get in an accident and your car is not worth fixing; it’s totaled, per the insurance company. Well, odds are that car winds up on a Copart lot. Then it’s put on Copart’s marketplace. The buyer could be a used car dealer, an exporter, a dismantler, etc. Copart takes a cut of the sales on its marketplace, as well as other fees for related services.
It’s been a very good business for a long time. Copart’s stock is up 12x over the last decade. And the business is getting better with age. Returns on capital are rising.
Copart dominates this industry. How much depends on who you ask, but it is probably something like 60-70% of the US market, with IAA getting most of the rest. But here’s the land angle, and it’s very similar to ODFL’s story…
I asked one industry veteran, “How hard is it to compete with Copart?” And his answer: “You’d be crazy to want to compete with Copart. For one thing, they own so much land…”
Land. Copart, too, invested a lot of money in land over the years. Hundreds of millions of dollars in land. But here’s the thing: IAA did not. It chose to lease land. Over time, the consequences of that decision loom large. And it is no easy fix for IAA.
A fellow investor told me that he discovered the land Copart bought around Los Angeles years ago is worth ten times what they paid for it. That’s a pretty good moat. You want to come into our market? Go ahead, pay 10x what we paid - or good luck leasing it... I mean, if you don’t have the land, you have no place to put the cars. That’s it.
Willis Johnson, the founder of Copart, understood the power of land early. As he says in his book Junk to Gold: “As long as we’ve got the land in the right place to put the cars on, we can’t fail. We are like the septic tanks of the sewer system. You can’t have the system without us.”
You read through Copart earnings call transcripts, you will find they talk a lot about land. As CFO Jeffrey Liaw put it on the last call, “We will continue to invest in our land and capacity because it is absolutely necessary to serve our customers well... So we are happily investing and have invested through the pandemic in additional capacity and expect to do so for years to come.”
My theory is that these businesses will age well. Their land positions give them impregnable competitive positions. It seems impossible to replicate what they’ve done. It would require enormous amounts of capital, and even then there are no guarantees. Certainly your returns would be far lower than these entrenched competitors, dug in with low-cost land in desirable locations...
All Reinvestment is Not Equal
All things being equal, everybody would prefer a capital-light business. A business that can grow and requires very little capital to keep growing is a wonderful thing. A business that needs to reinvest a lot of capital to grow is not as good.
But all reinvestment is not equal. In some cases, that spending leads to digging a wide and deep moat to keep competitors out. Not only that, it makes the business better, leading to rising returns on capital and increasing market share. ODFL and Copart are good examples of this dynamic at work. Keep an eye out for this kind of thing -- it might help you find your next big winner.
That's my story for today - I hope you enjoyed it. Thanks for reading!
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Published October 7, 2020
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