Trucker C.H. Robinson's Strategy of Not Owning Its Trucks Pays Off

Yahoo! Finance reports:

C.H. Robinson Worldwide Inc., (CHRW) which provides transportation and logistics services, said Tuesday third-quarter earnings grew 30 percent as gross profit grew across all segments. Revenue rose 15 percent to $1.71 billion, from $1.49 billion last year.

Like Landstar (LSTR), C.H. Robinson is a trucking company that doesn’t own trucks. Instead, it relies on independent truck owners to carry the loads it sources. And like Landstar, it was able to turn a nice revenue increase into an equally nice earnings increase (for Landstar we are talking about revenues excluding their hurricane relief efforts last year). This contrasts with traditional truckers like Arkansas Best (ABFS) which increased revenue by 11% but had its shares beaten up when the company reported that volume was slowing.

CH Robinson noted in its press release:

Our growth in truck net revenues slowed as the quarter progressed. While gross profit margins were consistent throughout the quarter, volume growth slowed. A significant amount of the volume in the second half of 2005 was driven by a robust spot market. In the third quarter and through the first three weeks of October 2006, we have not seen the same level of spot market demand.

The thing is, trucks are expensive. When they sit idle, the owner still has to make payments on them (even if only in the form of non-cash depreciation expense.) Maintenance costs also don’t entirely go away, though they are reduced some. When revenue slows down or drops, the fixed portion of maintaining a vehicle fleet weighs on earnings.

For the non-asset based transportation providers like Landstar or C.H. Robinson, these expenses fall to the independent contractors. So while there may be less profit due to less revenue, there will still be more profit than there would have been if they had a fleet of trucks to maintain.

CHRW-LSTR-ABFS 1-yr comparison chart:

Comments

[cheapstockh...:]

Trent, I agree with your conclusion that the non-asset based players are a smarter way to play the transportation space. While they have less operating leverage, at this point in the economic cycle, they will see less multiple compression when the "soft landing" materializes, because they have much lower fixed costs. That said, I recently looked at the group and felt that the valuations were a little rich, with the exception of PACR, a company that shares many of the same competitive advantages as CHRW, but at half the multiple. Have you ever looked at this name? I wrote an article in my blog about PACR....Thnks

cheapstockhunter.blogs.../

2006 Oct 26 08:04 PM

[William Trent_:]

Jonathan,

Sorry, I'm not that familiar with PACR. I know Landstar best, and some of the larger-cap names. After reading your post, though, they sound less similar to Landstar/CHRW than to Expeditors International (EXPD) or UTI Worldwide (UTIW). Although EXPD is far more richly valued, PACR's 16x forward P/E isn't that much lower than 20x for LSTR and 21x for UTIW when you factor in growth and ROE.

2006 Oct 26 10:22 PM