C.H. Robinson: Ride It Higher

Summary

• C.H. Robinson shares are trading at a 27% discount to the overall market.
• The company's cash hoard represents 50% of outstanding debt - very strong balance sheet.
• Assuming that company will continue to grow dividend at a rate of 6% per year, our growth model shows a 7.5% return on the shares to 2020.
• Our upward target price of $73.00.

I will admit that it's easy for me to have a positive bias where C.H. Robinson Worldwide (NASDAQ:CHRW) is concerned, given that my options on the stock made me a 32% return in January. Although the shares are down about 5% over the past year, I think it is time to return to the well and look into this company again. In my view, the fact that shares are down about 5% over the past year creates a buying opportunity for investors. I'll go through my reasoning by reviewing the financial history of the firm. I'll also predict what is a reasonable return in light of likely dividend increases going forward. I'll conclude with a short discussion about the stock relative to the overall market.

Financial Snapshot

It's difficult for me to find much to dislike about the financial history of C.H. Robinson. The firm has grown revenues at a consistent pace (CAGR of about 5.7% since 2011). Net income has been slightly more choppy, but it has grown at a CAGR of about 3% since 2011. At the same time, EPS has grown at a CAGR of about 5.4% as a result of an aggressive share buyback program.

I also think that management's actions have been exemplary here, in light of the fact that they have returned approximately $3.2 billion to shareholders over the past six years ($1.8 billion in stock buybacks, the balance in dividends). This is critical, in my view, because all businesses are affected to some extent by the business cycle. What matters is what management does about that innate volatility. In my view, company management has proven itself very shareholder-friendly by its actions over the past six years.

In addition, the balance sheet is in relatively good shape, in my view. In particular, debt is not a major issue for me here, as the cash hoard on the balance sheet represents about 50% of debt outstanding. In addition, debt itself is only about 13.5% of the capital structure, so there's little risk of the company suffering some kind of a liquidity or solvency crisis at this point.

Finally, C.H. Robinson has grown its aforementioned dividend at a very healthy pace (a CAGR of about 6.4% over the past six years), and I see no reason why this can't continue. The payout ratio is just under 50%, and there is no excessive debt to pay down in the near future, so as I model the dividend, I'll assume a continuation of this very virtuous trend.

Modelling The Dividend

The financial past offers an interesting guide for helping us understand where we are going, but investors obviously buy a future, and it's with that in mind that I'm going to attempt to come up with a reasonable forecast. Whenever I try to predict the future, I engage in a ceteris paribus exercise because, frankly, it's easier, and I'm less likely to create wild assumptions based on the movement of a few different variables. The one variable that I change is the dividend amount. Everything else (including yield) is held constant.

As I said above, I consider a 6% dividend growth rate to be reasonable for this company, so I’ll model that. When I perform this forecast on C.H. Robinson, I conclude a reasonable expectation for future share growth is about 7.5% a year, which is a very decent rate of return in light of the operating history and relatively low risks here.

Technical Snapshot

As per our ChartMasterPro Daily Trade Model, the trend for CHRW would turn bullish with a daily close above $70.00. This would signal a bullish breakout from an Ascending Triangle Pattern on the daily charts. From here, we see the shares rising to $73.00 over the next three months.

As you know, we like to anticipate technical breakouts when what we see on the charts supports our fundamental analysis. Today, we will buy CHRW call options, which will provide us approximately 14x leverage on our long trade. Our initial stop loss exit signal will be a daily close below $67.00.

For investors in the shares, we recommend you hold for three months or $73.00, whichever comes first. For longer-term investors (years, not months), we believe CHRW is a solid addition to any dividend growth portfolio.

Conclusion

Investors most often access the future cash flows of a given business by investing in shares that trade in the public markets. In my view, this is both good and bad. When the shares are priced for perfection, namely when the assumptions about future growth are quite optimistic, investors are in a dangerous position. If the company executes perfectly, shares may not do much, as they will have simply met expectations. If - as will happen eventually because of the vagaries of the business cycle, increased competition etc. - the company disappoints, optimistically priced shares will be punished.

On the other hand, when shares are priced with low growth expectations embedded within them, shares may represent good value. If the market expects little from a business, any growth will eventually be rewarded. In my view, C.H. Robinson is this type of stock, as evidenced by the fact that it trades at a significant (27%) discount to the overall market. This is very strange for a business like this, given the ongoing long-term potential in freight logistics (especially intermodal). It should also be said that not only are the shares trading at a discount relative to the overall market, but also to their own history.

Taking all of the above into account, including likely dividend increases, the inexpensive nature of the shares, the safety of the business etc., it makes a great deal of sense to buy C.H. Robinson at these levels.

Analyst’s Disclosure: I/we 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.

We trade options. Sometimes our trades last a few days, sometimes a few weeks, sometimes a few months. Please review our trade history listed in our Seeking Alpha Instablog posts to get a feel for our trading style.