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C.H. Robinson Worldwide (CHRW)

C.H. Robinson (CHRW) is one of the largest third-party logistics companies in the world and has been in business for more than 110 years. The firm essentially acts as a middleman in the transportation industry, helping connect companies that need to ship goods with cost-effective transportation providers that have capacity available via trucks, railroads, airlines, and ships.

C.H. Robinson doesn’t own hard transportation assets such as trucks and is instead a service company that utilizes people and technology to create transportation and supply chain advantages for its customers. 

The company has more than 120,000 customers and maintains relationships with over 73,000 carriers and suppliers, who it purchases shipping capacity from on behalf of its customers (the firm takes around a 15% cut of each transaction). C.H. Robinson’s services essentially help clients lower their costs, improve efficiency, and reduce risk. 

Approximately 81% of company-wide profits are from C.H. Robinson's North American Surface Transportation segment, which consists of truckload and less-than-truckload services. 

Global Forwarding (ocean, air, and customs services) accounts for another 12% of profits, and C.H. Robinson also has a small sourcing business (7% of profits) that sources fruits and vegetables for grocers and restaurants.

By end market, 21% of revenue is from food & beverage, 15% manufacturing, 15% retail, 14% auto/industrial, 12% chemicals, 6% paper/packaging, 5% professional services, 5% technology, and 7% other.

The company’s top 25 customers account for just 12% of total sales, underscoring its diversification.

Approximately 12% of C.H. Robinson’s net income is generated from operations outside of the U.S., and the business is investing to become more global.

Business Analysis

Many of C.H. Robinson’s advantages come from its scale – the company generates more logistics revenue than top rivals Landstar and XPO Logistics combined.

If you were a retailer that needed to cost-effectively ship goods across the country, you would want to use a broker that had access to the greatest number of shipping routes and carriers.

If you were a transportation company, you would want to work with a broker that had access to the greatest number of potential customers in need of your shipping services.

With access to more than one million pieces of equipment, C.H. Robinson boasts the largest contracted pool of motor capacity in North America.

The company has relationships with over 70,000 carriers, which provides its shipping customers with supply chain flexibility. In fact, C.H. Robinson delivers an average of three services per top 500 customer.

Connecting a global supply chain with hundreds of thousands of participants and even more variables is very difficult, but C.H. Robinson has the necessary relationships, technology, and employees to get the job done efficiently for customers.

As C.H. Robinson continues adding more shipping customers and transportation companies, its competitive advantages strengthen.

The company has expanded its number of transportation company relationships from 40,000 in 2005 to 73,000 at the end of 2017.

Likewise, its base of shipping customers has jumped from 20,500 in 2005 to more than 120,000 last year. This gives C.H. Robinson considerable purchasing power when dealing with transportation companies and helps its smaller shipping customers gain access to more affordable rates compared to what they could achieve going it alone.

As a result, C.H. Robinson has enjoyed steady growth in shipments, which more than quadrupled from 4.4 million in 2005 to 19 million in 2017.

C.H. Robinson’s vast network of offices has also helped it build valuable customer and carrier relationships over the course of decades. Close to 50% of its truckload shipments are shared transactions between offices, underscoring their importance and once again putting smaller rivals at a disadvantage.

As C.H. Robinson’s network and number of services offered continue to grow (transportation volumes across all services increased 9.5% in 2017), it should be able to take more market share of its large and highly fragmented industries.

According a company presentation, C.H. Robinson has less than 3% market share across its key areas of business in North America.

The company’s revenue has doubled over the past decade, and continued gains should be possible as C.H. Robinson uses its scale, breadth of supply chain services, extensive network, and technological investments to consolidate the market in the coming years.
Source: C.H. Robinson Investor Presentation
Besides market share gains, several secular changes should serve as tailwinds. Supply chains are increasingly global and complex. It makes less and less sense to keep these operations in-house if you are a business that ships goods.

Freight volumes should continue to climb, especially as online shopping grows and businesses outsource more of these complicated supply chain activities.

Real-time tracking data and just-in-time inventory are must-haves in today’s world as well, increasing the importance of robust technology systems.

For example, C.H. Robinson has over 6 million web and mobile interactions with customers and carriers each month, handles over 45 million digital transactions monthly, and has over 75% of its shipments tendered to it electronically.

Smaller service providers may be unable to keep up with customers’ demands for use of comprehensive, streamlined technology platforms.

C.H. Robinson launched Navisphere, its global transportation management system, in 2012. Its platform connects over 200,000 customers, carriers, and suppliers by the method of their choice – electronic B2B, web, mobile, and person-to-person.

The company’s programs automate more than 75% of all customer interactions and encompass the entire lifecycle of a shipment from notification through the delivery and financial settlement. This allows customers to have full visibility to all shipments and creates moderate switching costs over time.

The increasing importance of global transportation management systems and global trade will like put further pressure on the industry to consolidate, with larger players such as C.H. Robinson benefiting the most.

At the end of the day, C.H. Robinson appears to be a simple, time-tested business with numerous opportunities for continued earnings growth.

The industry is very competitive with relatively low barriers to entry (hence its fragmentation), but C.H. Robinson’s size, technology platform, breadth of services, and excellent financial health provide support for continued growth. Few companies can match the company’s scalable, reliable, and cost-effective service.

All things considered, the company believes it can grow revenue and diluted earnings per share by 5-10% and 10% per year, respectively, over the long term. These targets don't seem all that unreasonable. 

While trucking demand generally grows with GDP (low single-digits), increased outsourcing of supply chain services and the continued rise of e-commerce should help C.H. Robinson’s market enjoy a growth rate in excess of GDP expansion.

C.H. Robinson can also continue growing at a faster pace by expanding its market share with new and existing customers (large and fragmented markets), adding complementary services, growing its global network, and making bolt-on acquisitions.
Source: C.H. Robinson Investor Presentation

Key Risks

Despite C.H. Robinson’s variable cost structure, its margins can be noisy any given quarter depending on a wide range of factors – fuel costs, truck capacity, freight volume, etc.

C.H. Robinson’s transportation margin is the spread between the money it gets paid by customers to help them efficiently ship products and the price it pays transportation companies for their shipping services.

The chart below shows the volatility recorded in both prices paid by customers (light blue “YoY Price Change” and prices paid by C.H. Robinson to shipping companies (dark blue “YoY Cost Change” line).

The grey line is the transportation net revenue margin realized by C.H. Robinson, which has ranged between 15% and 22% since 2008. The company benefited from the drop in fuel prices in 2016, which caused C.H. Robinson’s transportation costs to temporarily fall faster than the contracted rates it maintains with shipping customers.

Margins usually compress when demand from shippers is weak and C.H. Robinson is unable to pass on all of its carrier costs to customers.

No one knows where margins could trend over the next few quarters, but investors should always be prepared for volatility. Over the long run, the company's margin seems likely to remain in the high teens, just like it has historically.
Source: C.H. Robinson Investor Presentation
What could challenge the high returns enjoyed by C.H. Robinson?

It’s worth pointing out that customer pricing (light blue line in the chart above) had been flat to negative from mid-2015 through early 2017, indicating challenging market conditions and perhaps increasing competition for customers in the brokerage business. (The healthy economy, higher freight demand and tight capacity caused prices to shoot higher more recently.)

Amazon released an app aimed at truck drivers in late 2017, and Uber launched its own Uber Freight solution in May 2017. If either of these companies becomes a meaningful player in this space, prices and margins could come under pressure over the long term.

However, some industry experts are skeptical that Amazon or Uber can become effective competitors, at least not anytime soon.

That’s mostly thanks to the extremely large and fragmented market (C.H. Robinson estimates it has less than 3% market share in North America), C.H. Robinson’s massive two-sided network, and the many challenges of scaling up in this.

DC Velocity provided a relevant excerpt here:

Evan Armstrong, president of Armstrong & Associates, a research consultancy that closely follows brokers and third-party logistics (3PL) providers, said it will be extremely difficult for any newcomer, regardless of its cache, to challenge the established providers, which possess formidable scale and unmatched access to carrier capacity. “This is why anyone’s pitch to charge customers lower margins is countered by the market reality that a large broker such as Coyote or Robinson, with billions of dollars of purchased transportation, can make a 15-percent gross margin on a load, and still price lower than a small broker only making a 10-percent gross margin,” Armstrong said in an e-mail.

Armstrong said he has a metric in mind to determine when Amazon might become a sustainable player in brokerage. “When Amazon has $1 billion of purchased transportation running through its freight brokerage operation, then it might have something disruptive,” he said.

Investors should continue keeping a close eye on the risk posed by Amazon and Uber to make sure that they don't infringe on C.H. Robinson’s long-term profitability.

Besides new tech-savvy entrants eyeing the logistics space, major transportation companies are continuously trying to bring logistics services in-house and consolidate, reducing the need for middlemen. For example, UPS acquired Coyote, a third-party logistics firm, for $1.8 billion in 2015. 

C.H. Robinson works primarily with small carriers, mitigating some of this risk. The large and fragmented nature of the market further reduces this risk as there are a number of opportunities for growth, especially as e-commerce continues taking off.

Technology advancements are perhaps a bigger threat because they could potentially disintermediate brokers. The rapid rise of Uber is one example of how technology can quickly disrupt previously slow-changing industries.

However, the transportation and logistics industry has been deregulated since 1980 and subjected to plenty of competition. C.H. Robinson has its own technology platform (Navisphere) that it is continuously investing in.

It also has the balance sheet strength to acquire potential threats and turn them into opportunities. The company’s acquisition of Freightquote.com in 2015 is one example.

Many customers and transportation companies have developed a familiarity with C.H. Robinson’s technology as well, creating some switching costs.

New entrants would also need to deal with the challenge of building a two-sided network (C.H. Robinson connects over 200,000 customers and carriers). For now, it doesn’t appear like C.H. Robinson will be disintermediated anytime soon, but it’s worth keeping an eye on.

It goes without saying that the brokerage and logistics markets are extremely competitive with relatively low barriers to entry and volatile pricing trends.

However, C.H. Robinson’s scale, network relationships, technology platforms, and reputation seem likely to protect its long-term earnings power and growth opportunities.

Closing Thoughts on C.H. Robinson

C.H. Robinson has proven to be a very durable company over the years. The business enjoys an asset-light model which generates consistent free cash flow, holds profits fairly steady during industry downturns thanks to its variable cost structure, and earns solid returns on invested capital.

When combined with management's conservative capital allocation and the essential logistics services C.H. Robinson provides, the company has been able to reward shareholders with higher dividends each year since it went public in 1997. 

While the company's margins can fluctuate from quarter to quarter depending on a number of factors, C.H. Robinson's long-term outlook appears to remain solid. The firm's large and fragmented markets, its leading scale, the challenges of building an effective two-sided market, its continuous investments in technology, and the continued growth in e-commerce shipping volumes all support this view.

As the company continues to expand its number of services and route locations, C.H. Robinson should continue strengthening its moat and rewarding shareholders with predictable dividend growth for many years to come.

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