Just In Time
One of my favorite places to look for excellent businesses is in industries that are boring, unloved, highly fragmented or difficult to understand. Understanding an obscure industry can offer investors the ability to achieve an edge and the chance to generate outsized returns. One such industry that is both highly fragmented and challenging for many investors to understand is logistics, particularly third party logistics.
Many third party logistics companies are asset light, and thus are often ignored by investors that seek to invest in companies trading close to book value. While investors that are strict adherents of Ben Graham's philosophy may pass certain companies up due to not appearing to be cheap from a quantitative perspective, I believe that many of these companies offer investors the chance to purchase a "wonderful business at a fair price."
In an earlier article, I discussed the Forward Air Corporation (NASDAQ:FWRD), a small and obscure asset light company operating in a niche area of the logistics industry (airport-to-airport transportation and deferred air freight) that has continued to steadily grow its profitability and share price due to a combination of a niche market, strong business model and favorable macroeconomic factors.
Another company in the logistics industry that I believe represents a compelling investment to investors at current price levels due to its industry reputation, diverse operating platforms and underappreciated growth potential is C.H. Robinson Worldwide (NASDAQ:CHRW).
What C.H. Robinson Does
(Quoted Text Courtesy of Google Finance)
Founded by Charles A. Robinson more than a century ago, the company began its history in the produce business. Initially operating as a produce sourcer in the Midwest during the early part of its history, C.H. Robinson gradually expanded in both size and scope, moving into trucking and eventually logistics operations that serve the air, land and sea transportation sectors. In addition to growing organically, the company also has also expanded its footprint outside of the United States through gradually acquisitions to the point where the company now
"operates through a network of 276 offices, which the Company calls branches, in North America, Europe, Asia, South America, and Australia. The Company has developed global transportation and distribution networks to provide transportation and supply chain services worldwide. In addition to transportation, the Company provides sourcing services (Sourcing). The Company's Sourcing business is primarily the buying, selling, and marketing of fresh produce. The Company supplies fresh produce through its network of independent produce growers and suppliers. The Company's customers include grocery retailers and restaurants, produce wholesalers, and foodservice distributors."
Though the company began as a produce sourcer, the company's logistics segment now comprises a majority of its revenues (Per the company's most recent 10-K report, revenue from produce sourcing comprised approximately 14% of the company's total revenue, with logistics accounting for the vast majority of revenue remaining). C.H. Robinson acts as a third-party (or 3PL) logistics operator, meaning that the company connects businesses that need goods transported with freight carriers that have capacity which needs to be filled and vice-versa.
Given the increasingly globalized nature of world commerce, C.H. Robinson is able to benefit from many businesses outsourcing some or all of their transportation and related logistics needs to a qualified third party due to the inherent complexities of transportation management, warehousing and customs regulations on a global scale. The company has also taken steps to both articulate and execute its goals in a clear and coherent fashion to shareholders in its annual reports:
"Since we became a publicly-traded company in 1997, our long-term compounded annual growth goal has been 15 percent for net revenues, income from operations, and earnings per share. Although there have been periods where we have not achieved these goals, over the period since 1997 we have exceeded this compounded growth goal in all three categories. Our expectation is that over time, we will continue to achieve our long-term goal of 15 percent growth, but that we will have periods in which we exceed that goal and periods in which we fall short. We expect to reach our long-term growth primarily through internal growth but acquisitions that fit our growth criteria and culture may also augment our growth."
The Numbers on C.H. Robinson
With a market capitalization of $7.57 billion, the company is of moderate size and moderately priced at a P/E ratio slightly below 20. With a book value of $5.99 against a price of $50.96 per share, many investors approaching this stock from a purely quantitative perspective may be driven to dismiss it as an investment candidate due to the apparently high multiples being paid for the business.
Though the company does trade at an (apparently) extremely high premium to its hard assets, it is important for investors assessing this company to be aware of the fact that C.H. Robinson's major intangible assets include the company's network of logistics professionals, their relationships with numerous businesses and C.H. Robinson's contracted relationships with freight carriers and though these assets lead to years (if not decades) of dependable earnings, they do not show up on the balance sheet. If one were to examine the Price to Sales ratio of the company (standing at .64), one would find that investors are currently paying 64 cents for every dollar of the company's revenue, something that I find indicative of a potential value opportunity.
The company also pays a dividend, which has increased significantly over a ten year period and now currently yields 2.74% at current prices with a payout ratio of .53. The company has also repurchased shares and has recently increased share repurchase authorization to 9.3% of the total outstanding float, something which I believe is prudent given the fact that shares of the company are currently trading near four year lows.
Insider ownership in C.H. Robinson is low, and currently stands at less than one percent. While I am normally attracted to companies that have a high percentage of insider ownership, I believe that given the long operating history of the company that it is not a negative in this case.
Harnessing the Shift to Intermodal: A Regulatory Windfall
In a few previous articles, I have written about how recently implemented federal transportation regulations affecting trucking will likely lead to a change in the way freight is transported in the United States. Trucking will grow more costly, and short distance freight transportation by rail will benefit considerably. Intermodal transportation required to move freight, particularly containerized freight, is expected to continue to increase significantly due to the lower cost of moving freight by rail.
While transporting freight by rail may provide significant cost benefits, it is also a complex process as it involves more logistical complexity due to freight being transferred from several different modes of transportation (hence the term "Inter-Modal"). Due the increased complexity of the process involved in consolidating and transporting freight, the demand for C.H. Robinson's services will grow significantly as more businesses seek to reduce costs through intermodal transport.
C.H. Robinson has made significant investments into the intermodal portion of its business as the sector is expected to drive significant growth in the future as businesses begin to understand what changes in trucking regulations mean for their transportation needs. C.H. Robinson also benefits significantly from this period of medium term uncertainty, as the demand for their expertise in handling freight transportation will grow significantly due to the multi-step and hence more complicated nature of intermodal transportation, generating increased penetration among their current clients in addition to organic growth through new customers.
Embracing Technology: Two Platforms Driving Efficiency and Consumer Engagement
"Big Data" has become one of the hottest sectors of technology over the past several years due to the myriad of applications and the efficiencies that can be generated from the intensive study of a large data set or the access to a large amount of information that was otherwise previously opaque. C.H. Robinson has heavily invested in the development of sophisticated technology platforms in recent years in order to streamline their industry. One platform that the company has developed for businesses that use C.H. Robinson for their freight needs is known as Navisphere, which allows all of the company's customers shipping freight to access and interpret information about their shipping history, delivery times, rates and other various in an easy to use software interface.
One of the significant competitive advantages about C.H. Robinson's Navisphere platform is the fact that the company is able to deliver this proprietary software to customers to allow them to understand and track their cargo quickly, either via a computer or a mobile application. This is particularly important as many of C.H. Robinson's customers do not have significant logistical capabilities on their own and instead rely on a third party to manage these details. For anyone who has regularly shipped a significant quantity of goods on a time definite basis, having the ability to access all of the details and processes needed during the transportation process is incredibly useful and increases market penetration.
Given that C.H. Robinson both engages with shippers and carriers, the company has also developed a technology platform for freight carriers (i.e., those who own trucks) that helps to increase operating efficiency and improve engagement. Known as CHRWTrucks, this technology enables brokers to "find a load or post a truck," meaning that truckers are able to signal they are in search of freight to carry or to advertise that their capacity is currently unused and to connect with freight.
I believe that C.H. Robinson's carrier platform will become increasingly important in the coming years due to the fact trucking regulations have the potential to constrict the total numbers of trucks on the road (through limiting the number of hours that truckers can be on the road), allowing the company to establish a large dependable network of carriers that can fill their freight needs in an efficient manner.
Don't Count The Produce Segment Out: Potential Growth in Non-Core Operations Due to The SYSCO-United Foods Merger
Though investors may think that C.H. Robinson's produce sourcing business represents a legacy asset from the early portion of the company's history, it does generate a significant minority of the company's revenue, accounting for 14% in 2012. I also believe that this segment is positioned for growth in the medium term for one reason that may elude many analysts: The SYSCO-United Foods merger.
While the recently announced SYSCO-United Foods merger will create one of the largest food distributors in North America, it has the potential to cause the newly combined entity to either shed business segments due to antitrust regulations or cause a reduction in the variety of food sold, potentially causing consumers to seek out alternate produce suppliers.
I believe that due to the logistical capacity of C.H. Robinson, the company is well situated to pick up the slack from any disruptions caused by this situation and is positioned to acquire divested assets in the produce sourcing sector or to acquire market share from consumers that are in search of more variety and alternate produce suppliers, making the company uniquely positioned to leverage its operating strengths into growth in the food distribution sector.
Not only is the company well positioned to benefit from purchasing any divested assets, the company has also allocated resources to developing proprietary brands in its fruit sourcing segment, having recently introduced new lines into its produce sourcing operations including the Happy Chameleon brand, which specializes in sourcing tropical fruits such as Pineapples.
Why Now? Trading At Multi-Year Lows and Attracting Attention From Smart Money
It takes but a brief glance at the 10 year chart for C.H. Robinson to see that the company has lagged the broader stock market for the past several years, something that may irk long-term C.H. Robinson shareholders but provides current investors with a welcome opportunity. Despite the fact that the company has underperformed relative to the S&P index, I believe that the company is now trading at valuations that finally make it extremely attractive from a risk/reward perspective.
One metric I utilize to help value businesses that either have zero debt or are "asset light" is the growth of the company's dividend relative to the price of the company's shares. Anytime I see a company that has grown its dividend significantly but has not appreciated in share price, I believe that there is the potential for a mis-priced situation. In this situation, I am particularly encouraged by the fact that the company has both grown its dividend at a regular pace and has repurchased shares.
In the case of C.H. Robinson, investors have seen their dividend payments increase substantially over a 5 year period. The company is now currently paying a dividend that is 45% higher than it paid in 2009, despite the fact that shares in the company can be purchased for almost the same price.
If one were to multiply lowest price of C.H. Robinson's shares from the previous five year period of $38 (a price level that was only briefly reached during the depths of the financial crisis) by the factor the company's dividend has increased by since that period (45%), one arrives at an approximate valuation of $55 per share using the absolute low price reached during the financial crisis as a barometer.
If an investor elects to utilize a more "normalized" price from 2009 of say $50 per share and adjusts for a 45% increase in the company's dividend, investors arrive at a price of $72.5 per share, or almost 39% higher than current prices. While I would caution investors against placing a specific price target on a company, I believe that using this rough valuation method helps to illustrate the fact that C.H. Robinson shares are meaningfully undervalued at current prices.
I am also not alone in my thinking that C.H. Robinson is undervalued. One particularly well regarded individual in Value Investing circles known as the "400% Man," Allan Mecham, has committed a meaningful amount of his fund's capital towards the purchase of shares in two logistics companies: C.H. Robinson and XPO Logistics (NYSE:XPO), which together comprise 16% of his funds total holdings. As a Buffett disciple (and also with Berkshire Hathaway as his largest portfolio holding), I believe that investors ought to take heed of Mecham's purchase of C.H. Robinson as a "wonderful business at a fair price" and be especially mindful of the fact that shares are now below the price at which his fund made their initial investment.
Despite the fact that C.H. Robinson has a strong business model and an excellent reputation in the logistics industry, investors must be apprised of several risks specific to the company. Given the fact that the company provides a service that is dependent upon the movement of goods, C.H. Robinson is vulnerable to a decline in the global economy and will experience reduced revenue if less goods circulate.
As a fellow contributor discussed in an excellent article, the company benefits when the transportation industry it serves has been thrown "out of equilibrium" - i.e., when there are too few trucks and too much demand for freight carriage (something likely to be the case in the near future due to recently instituted federal trucking regulations). As the freight market gradually adjusts to the new transportation environment (more intermodal freight and an increased demand for trucking) in the coming years, C.H. Robinson might witness margin compression due to the fact that transportation supply will begin to match the demand for freight transportation.
Given the fact that the company operates in a commodity business (the buying/selling of freight space), C.H. Robinson is also vulnerable to competition from entrants into the logistics space, including XPO Logistics (a highly volatile company growing at breakneck speed). Despite the fact that the company's large network of brokers and long operating history have cemented its status as a "best of breed" logistics company, it is important to be aware of the fact that the company could face increased competition in the future should the industry become disrupted.
At current price levels, C.H. Robinson represents an opportunity for investors to purchase a high quality company at a fair or even bargain price. Despite the fact that the company primarily operates in a "commodity" type business, C.H. Robinson benefits from a long operating history, proprietary technology and a dominant competitive position in the logistics industry, factors that help to establish a competitive moat for the company.
In addition, I also believe that the company is well positioned in the coming years to benefit from growth through acquisitions in its core business due to the highly fragmented nature of the logistics industry, an increase in intermodal freight traffic and growth potential in its produce sourcing operations.
With shares of the company trading at almost four year lows despite consistent dividend increases during the same period of time, I believe that investors are now presented with a compelling long-term opportunity to own shares of an excellent business that has largely gone unappreciated by the broader market in recent years.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CHRW over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.