C.H. Robinson Worldwide Has the Perfect Business Model for This Market

Unemployment is on the march, the plummeting housing market has yet to find a bottom and top U.S. companies in the banking and automaking sectors remain downright shaky. And yet the U.S. stock market – as a discounting mechanism – experienced a robust rally last week, posting a four-day rally that saw the Dow Jones Industrial Average gain 9.0% and the Standard & Poor’s 500 Index a resounding 10.7%.

Unfortunately, in an economy that has been deeply hurt by huge imbalances that took years to build, we are left with key sectors that are operating in distress mode. They are now at the mercy of the aggressive government actions being taken in an attempt to whip them back into shape.

Of course, it is always preferable to invest in an environment where the private sector is taking steps to increase efficiency on its own and adjusting to economic realities as needed. But we do not have that luxury today. What we need to remember, though, is that the stock market will be the leading indicator of the coming recovery. In fact, the stock market will rally well before unemployment peaks and before all the other problems wrought by the financial crisis are actually solved.

The only problem is that the speed and stability of any eventual rebound will depend on the prudence and appropriateness of actions taken by Congress and the U.S. Federal Reserve. And because these actions, and their effectiveness, are very difficult to predict, we are going to resist the temptation to speculate.

Instead we will take advantage of stocks that have been oversold, in spite of having favorable fundamentals. That leads us to C.H. Robinson Worldwide Inc. (Nasdaq: CHRW), a shipping and transportation-services company that enjoys consistent growth, high profit margins, strong cash flow, no debt and proven stability.

Last year, I recommended CH Robinson in Money Morning’s sister publication, The Money Map Report, and I was not disappointed.

Despite the very challenging economic conditions, CHRW’s stock not only greatly outperformed, but it actually traded up, while the Standard & Poor’s 500 Index traded down. In fact, we ended up taking profits of close to 20%. The stock then consolidated and overreacted to the crisis. But today, we find the company vastly oversold, and trading well below its fundamentals.

C.H. Robinson shares closed Friday at $42.72. That means the shares are up 17% from their 52-week low of $36.50, but remain down 36% from their 52-week high of $64.36.

That’s better than the market. In fact, even over the longer-term, C.H. Robinson’s shares have exceeded that of the broad market. Over the last couple of years, if you held only this stock, you would be down just 20% – and not the near-50% that the S&P 500 is down over the same period. This speaks volumes about the quality of CH Robinson’s business model.

C.H. Robinson: The Asset-light Antidote for Recession

I stumbled upon C.H. Robinson many years back, when I was working on an acquisition of a major grocery wholesaler. My task was to financially “model” the deal, and our team leader kept referring to the transformation that we were going to bring about on the target company by selling off its production farms and transportation assets in an effort to increase the company’s efficiency, flexibility and core focus.

A company that has huge investments in fixed assets is generally hit hard in recessions. The reason: As its volumes go down, the very high proportion of fixed costs in its cost structure not only destroys its profit margins, it can put the entire company in peril, as the debt might be difficult to refinance.

C.H. Robinson actually went through a similar transformation many years back. It shed most of its assets and became the premier virtual third party logistics company in the United States, focusing on trucks. I say “virtual” because the company does not own any trucks, ships, or airplanes.

Think of C.H. Robinson as an extremely efficient cargo-reservation system with an unparalleled network of trucking companies and independent truckers that hunger for whatever business that they can get from C.H. Robinson. C.H. Robinson gets booking fees from these companies and individuals without taking on the added costs or risks associated with actually owning the vehicles.

Therefore, in recessionary times, when business is down, the value of C.H. Robinson actually increases for the truckers, as it can actually mean the difference between financial life and death.

Despite a 4% drop in trucking volume in the fourth quarter, C.H. Robinson actually managed to marginally increase its revenue, expanding its gross margin from close to 17% to more than 18%. Similarly, return on assets (ROA) advanced from 17% to 20%, while net cash flow more than doubled to $272 million.

The fact that the company has no debt also helps, because there are no interest expenses. And the strong cash flow has helped C.H. Robinson to increase its cash holdings to almost $500 million. That will allow the company to continue with its aggressive buyback of shares, increasing returns and preserving its ultra-safe dividend yield – currently a comforting 2.25%.

C.H. Robinson has managed to achieve all of these targets while expanding international operations to Prague, in the Czech Republic, and Corpus Christi, Tex.

Its unique business model – one that endows C.H. Robinson with a strong and sustainable competitive advantage, operating flexibility, negligible fixed costs and most importantly, a long list of value-added services – matches up with the company’s solid financial strength, and is invaluable in these times, when cash and financial strength rule.

C.H. Robinson, which last year grew revenue by 17% and profits by 10% in the midst of the worst recession since 1929, is an absolute steal: The shares were recently trading at a Price/Earnings (P/E) ratio of slightly more than 20.

We are likely to see an orderly restructuring and a jump-starting of the Detroit automakers in the next few years, as carmakers reach agreements with their unions and bring their workforce costs down to competitive levels. This, combined with the very aggressive measures from the U.S. Federal Reserve and the Obama administration stimulus plan, should stabilize the economy and restart growth.

So the question is not if, but when to buy CHRW. Our recommendation is that investors should capitalize on the current oversold condition of the market and buy two-thirds of your intended position in this stock now, leaving yourself room to buy the final third in case the market re-tests its lows.

Disclosure: Horacio Marquez holds no interest in C.H. Robinson Worldwide Inc.

Original post

Comments

[User 46786:]

CH revenue and profits grew last year because they kept the fuel surcharge money they were paid by the shipper instead of passing it through to the trucker. Shame on you CH.

Mar 16 09:07 AM

[truck monke...:]

That is complete speculative, misinformed hogwash. Fuel surcharge makes up for approximatly in the range of 15-30 percent of total freight charges. Now, 2008 results clearly show that C.H. Robinson only grew a little over 10 percent. So what happened for the other 5 to 20 percent, did that vanigh into thin air??? Shame on you for failing 5th grade math and jumping on the bandwagon of Third Party Logistic haters.


On Mar 16 09:07 AM User 46786 wrote:

> CH revenue and profits grew last year because they kept the fuel
> surcharge money they were paid by the shipper instead of passing
> it through to the trucker. Shame on you CH.

Mar 16 06:29 PM

[Jtrucker:]

The 2008 growth of 10% took place in an environment that saw 6500 trucking companies go out of business due to huge fuel costs and decreased shipment volumes. I experienced first hand the failure of CH to offer any more money on lanes for fuel as prices skyrocketed despite having fuel surcharge programs with shippers. I also employed a former supervisor of theirs who told me his office offered incentives based on how much of the fuel surcharge they kept instead of passing on to the truckers. The only hogwash is that they are able to get away with it!

May 26 04:43 PM