The leading third party logistics company in North America,C.H. Robinson Worldwide Inc. (CHRW) is slated to release its second quarter earnings on July 26 after market closes. The current Zacks Consensus Estimate for the second quarter is pegged at 69 cents, representing an annualized growth of 16.10% from the year-ago level.
With respect to earnings surprise, over the trailing four quarters, C.H. Robinson has outperformed the Zacks Consensus Estimate for all the three quarters except for first quarter 2011. The company missed the Zacks Consensus Estimate by a penny in the last quarter, and delivered a negative earnings surprise of 1.67%.
Overall, the company delivered average positive surprises of 2.41% over the last four quarters. But several factors lead to our cautious stance on its second-quarter financial results.
C.H. Robinson remains benefited from improving market fundamentals that support pricing and market share gains. Additionally, capacity constraints in the truck market, resulting from a surge in intermodal freight transportation, continue to drive favorable trends for the company’s Transportation segment.
We believe that C.H. Robinson remains successful in establishing itself as a “one stop shop” solution for all transportation and logistics services at lower prices, driving demand growth. However, the company’s near-term projection of increasing the employee base to support service level has triggered negative sentiments in the market toward its margin growth. Further, the Sourcing segment’s declining performance on loss of major customers also play an important catalyst for our neutral outlook on the company over the near term.
First Quarter Flashback
In the first quarter, C.H. Robinson’s adjusted earnings were a penny less than the Zacks Consensus Estimate but remained above the year-ago level on strong pricing and higher shipments. The capacity constraints in the truck market worked in favor and led to higher prices and C.H. Robinson’s multi modal transportation solutions aided volume growth.
Total revenue in the first quarter increased primarily on the strength in the Transportation segment. However, operating expenses rose year over year as a result of increased personnel as well as selling, general and administrative expenses. In the first quarter, the company incurred higher incentive compensation expenses due to increased headcount.
Agreement of Analysts
Estimates for the second quarter have been showing no change over the last 7 days but indicate a downward trend over the last 30 days. Over the last 7 days, none of the analysts out of 24 made a downward revision or moved in the opposite direction. Over the last 30 days, 2 analysts reduced their estimates while 1 made a positive revision.
For fiscal 2011, out of 27 analysts, none revised the estimate in the last 7 days. However, only 1 analyst made a positive revision to the estimate over the last 30 days, whereas 3 revised their estimates downward.
Similarly, for fiscal 2012, out of 27 analysts, none revised the estimate in the last 7 days. An upward and downward revision was made over the last 30 days, by one analyst each.
We believe the cautious outlook of analysts stem from management’s projection of increasing headcount to support business expansion, which they believe will weigh on operating costs and adversely impact the company’s margin over the near term. Additionally, the company projected costs associated with variable incentive plans to increase. Further, the Sourcing segment continues to witness declining revenues due to the loss of business to a large customer base like Wal-Mart (WMT). The analysts on the sidelines believe this segment will continue to deliver lackluster results unless the company targets new business opportunities.
Magnitude — Consensus Estimate Trend
Over the last 7 and 30 days, the magnitude of the second quarter estimate revisions remained unchanged at 69 cents.
For fiscal 2011, the Zacks Consensus Estimate remained static at $2.72 over the last 7 and 30 days.
Similarly, fiscal 2012 estimate revisions remained constant at $3.19 over the last 7 and 30 days.
Our Analysis
Although C.H. Robinson will benefit from its growing Intermodal and freight forwarding businesses, network expansion and long-term investments, it will likely remain pressured on the margin front given its accelerated hiring programs. Further, C.H. Robinson remains challenged by regulatory pressures from various government bodies, higher carrier costs and competitive threats from logistics services companies such as Expeditors International of Washington Inc. (EXPD).
Thus, we are currently maintaining our long-term Neutral recommendation on C.H. Robinson supported by a Zacks #3 (Hold) Rank.
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