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The Open Road Is Calling for Investors
03/05/2013 7:45 am EST
Matt Coffina of Morningstar StockInvestor sees miles of potential in this truck and shipping brokerage, which has already captured impressive share of one of the most fragmented corners of the market.
C.H. Robinson (CHRW) is a third-party logistics, or 3PL provider, with a focus on North American truck brokerage. The company acts as a hub connecting businesses that need to ship things (shippers) with carriers that have transportation capacity.
While Robinson is the industry leader, the transportation market remains highly fragmented. Robinson has about 5% of the US third-party logistics business, and touches only about 3% of total trucking volumes.
The company has been consistently capturing market share for decades, as the 3PL segment displaces asset-based truckers, and as Robinson wins customers at the expense of smaller and less sophisticated 3PL providers. But the runway for continued growth appears long.
Both shippers and carriers benefit from working with C.H. Robinson. The company ended 2012 with approximately 42,000 customers, for which it provides shipping capacity through 56,000 independent carriers.
The fragmented nature of trucking is the primary reason an intermediary like Robinson is needed. More than 95% of truckload carriers operate fewer than 20 trucks. For carriers, Robinson provides freight opportunities that increase truck utilization and reduce empty miles. For shippers, Robinson consolidates buying power, ensures service quality, and converts logistics spending into a variable cost.
The biggest risk I see with C.H. Robinson is net revenue margin contraction. The company's profitability depends on earning a spread between the prices it charges customers and the rates it negotiates with transportation providers.
This net revenue margin has been trending steadily downward since 2009. The primary driver appears to be cyclicality, with relatively tight trucking capacity forcing up costs, and slack demand making it difficult to pass higher costs through to shippers. Recent net revenue margins have been at the low end of the historical range.
If cyclicality were the only reason for depressed margins, I wouldn't be too worried. However, there is also a possibility that competition has intensified. Attracted by the high returns on capital of the asset-light 3PL model, many transportation companies are trying to expand into this niche, perhaps sacrificing margins in an attempt to achieve viable scale.
There is also a mild risk of technological disruption from innovative competitors such as Echo Global Logistics (ECHO). On the last conference call, C.H. Robinson's management talked about the need to improve productivity to remain competitive, in particular by automating processes, such as ordering that are currently handled by salespeople over the phone.
In any event, concern about margin contraction in the last quarter is what has the stock trading down recently. It is possible that C.H. Robinson's net revenue margins have reset to a permanently lower level, although I still expect some margin recovery from here, as demand for shipping capacity improves along with the economy.
More importantly, I think C.H. Robinson's unmatched network and value proposition should allow it to continue capturing market share. Furthermore, the company's large free cash flows and minimal debt on the balance sheet enable the exemplary management team to boost shareholder returns through stock repurchases and a growing dividend.
The low capital intensity of the business, our expectation of 12% annual EPS growth over the next several years, and a price-to-fair-value ratio of 0.79 make C.H. Robinson one of the best opportunities available to us in the current environment.
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