C.H. Robinson’s 3PL Services Strong amid Soft Market Trends

On Sep 30, 2014, we issued an updated research report on C.H. Robinson Worldwide Inc. (CHRW).

C.H. Robinson has delivered positive earnings surprises in two quarters last year, with an average miss of 2.2%. Meanwhile, the company reported strong financial results for the second quarter of 2014 wherein both the top and the bottom line surpassed the Zacks Consensus Estimate.

C.H. Robinson is considered to be among the first-in-class third-party logistics (3PL) companies given its consistent growth rate achieved in the past few years. The company will execute its go-to-market strategies with its current resources and expand business through investments made in the last couple of years. We believe that the demand for 3PL services is rapidly growing as shippers seek cost effective one-stop solutions for their freight forwarding requirements.

The company’s management intends to gain market share on the back of investments made in technology and the current resources available. We expect the growing demand for customs brokerage and transportation management services to help the company grow beyond its core offering of truck brokerage.

Significant investments in complementary business segments like air and ocean will benefit the company over the long term as shippers continue to seek integrated solutions. C.H. Robinson’s custom brokerage is growing steadily with improving net revenues while air business is leveraging from integration of its global forwarding business, thus creating better margin opportunities.

On the flipside, The Truckload business remains highly challenged given the uncertainties shrouding the market. Also, the current trend of road freight conversion to rail intermodal may impede the trucking business. Further, the company foresees growth in expenses in the Less-than Truckload (LTL) space.

Overall, C.H. Robinson’s net revenue (gross) margin depends on the cost of transportation, which has been on the rise of late. We believe that the company is facing stiff market conditions such as intense competition and capacity constraints in the truck market, which are resulting in a persistent decline in net revenue margin. Meanwhile, loss of business from a large customer will continue to create challenges in the Sourcing business. The adverse economic condition is compelling shippers to follow aggressive cost management within their supply chain, thereby making them unreceptive to price increases. As a result, C.H. Robinson is struggling to pass on higher transportation costs to customers, resulting in lower profits.

Well-performing sector participants worth considering are Dynagas LNG Partners LP (DLNG), Echo Global Logistics Inc. (ECHO) and Expeditors International of Washington Inc. (EXPD).