Still Avoiding C.H. Robinson
Summary
- In some ways, the financial results were alright, and I think the dividend is reasonably well covered. The problem is the large amount of debt rolling this year.
- In spite of this, the shares aren't objectively cheap, in my view. For that reason, I would recommend continuing to avoid the shares.
- Investors are receiving 225 basis points less from the dividend in this risky business than they would from the much less risky 10-Year Treasury Note.
shaunl
It's been about 8 ½ months since I recommended investors continue to avoid C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW), and in that time, the shares are down about 6.7% against a loss of about 2.65% for the S&P 500. The company has obviously posted results since, so I thought I'd review the name. After all, an investment priced at $100 is, by definition, less risky than the same investment priced at $109. I'll review the latest financial results, and will look at the valuation to see if it's worth buying at the moment, given the multiplicity of risk present.
We're all busy people. I'm sure some of you have to work out which supermodel you're going to hang out with this weekend, and some of you are putting the finishing touches on the string theory article you're about to send off for publication. For my part, I've got about 100 hours of Young and the Restless to catch up on, and I can't wait to find out how Chance Chancellor reacts to Abby's infidelity. Anyway, we're all busy, and part of the way I try to make your reading experience as pleasant as possible is to offer the "gist" of my thinking upfront, so you can limit your exposure to "Doyle mojo" to the absolute minimum. You're welcome. I'm of the view that investors would be wise to continue avoiding C.H. Robinson stock. The company is rolling over $1 billion of debt this year, and, as you may be aware, interest rates this year are higher than they have been previously. Additionally, the company may be charged a higher interest rate when influential firms start finally downgrading the stock. In the teeth of this, the shares aren't objectively cheap. Worst of all in my view, investors in this stock, with the host of risks that come with that investment, are receiving ~225 basis points less income than they would if they bought the 10-Year Treasury Note. Taking on more risk to receive less income than the risk-free rate makes very little sense to me, and for that reason, I would recommend continuing to eschew these shares.
Financial Snapshot
I think the most recent financial results here have been rather good, actually. Specifically, compared to 2021, revenue and net income in 2022 are up by about 7% and 11.4% respectively. Given the colossal buyback program of $1.359 billion over the past year, the number of shares outstanding has dropped by about 9.5%. The upshot of this is that EPS is up by about 17.25% in 2022 compared to 2021. The one thing that does alarm me from the income statement is the fact that interest expenses have climbed by about 67% over the year, from $59.8 million in 2021 to over $100 million in 2022.
I think it may have been wiser for management to have knocked down some of the $1.973 billion of debt with the $1.359 billion that they spent on buybacks. I think buybacks were especially ill-timed, given the size and timing of contractual obligations, per the following, plucked from page 35 of the latest 10-K for your enjoyment and edification:
C.H. Robinson Cash Obligations (C.H. Robinson latest 10-K)
We see from the table that the company is on the hook to roll about $1.074 billion of its debt this year, including credit agreements and long-term notes payable. If you've been following the financial news, you know that interest rates are relatively higher this year than they have been in the past, and so I don't think it's unreasonable to fret that interest expense will continue to rise in the future.
Digging deeper into the capital structure, debt isn't much worse than it was in 2021, but it is much higher than it was in the pre-pandemic era. Specifically, at the end of 2019, debt was about $1.092 billion, and today it's about $881.3 million higher than that. An 80% increase in a few years is troubling in my view. I think the shares should be discounted to reflect the risk from higher debt levels, and the potential for future higher interest rates. The debt doesn't disqualify this from consideration, but investors should be compensated.
All that written, I think the dividend is reasonably well covered, given that dividend payments represent only about 30% of net income, and the payout ratio is currently only about 7%. Given the above, I'd be happy to buy this company at the right price.
C.H. Robinson Financials (C.H. Robinson investor relations)
The Stock
My regulars know that I've talked myself out of some profitable trades with the words "at the right price." Missing upside is obviously not ideal, but I'm of the view that it's better to miss out on some gains than lose capital. My regulars also know that I consider the "business" and the "stock" to be quite different things. Every business buys a number of inputs and turns them into a final product or service, like freight transportation. The stock, on the other hand, is an ownership stake in the business that gets traded around in a market that aggregates the crowd's rapidly changing views about the future health of the business, future demand for logistics services, etc. The stock also moves around because it gets taken along for the ride when the crowd changes its views about "the market" in general.
This stock price volatility driven by all these factors and more is troublesome, but it's a potential source of profit because these price movements have the potential to create a disconnect between market expectations and subsequent reality. In my experience, this is the only way to generate profits trading stocks: by determining the crowd's expectations about a given company's performance, spotting discrepancies between those assumptions and stock price, and placing a trade accordingly. I've also found it's the case that investors do better/less badly when they buy shares that are relatively cheap, because cheap shares correlate with low expectations. Cheap shares are insulated from the buffeting that more expensive shares are hit by.
As my regulars know, I measure the relative cheapness of a stock in a few ways. For example, I like to look at the ratio of price to some measure of economic value, like earnings, sales, free cash, and the like. I like to see a company trading at a discount to both the overall market, and to its own history. In case you need to be reminded, when I last reviewed C.H. Robinson, the PE was sitting at about 15.5 times. Fast-forward several months and the shares are actually about 11% cheaper per the following:
The problem for me relates to the fact that the dividend yield is currently about 225 basis points lower than the risk-free rate.
As my regulars know, in order to validate (or refute) the idea that the shares aren't objectively cheap, I want to try to understand what the crowd is currently "assuming" about the future of a given company. If the crowd is assuming great things from the company, that's a sign that the shares are generally expensive. If you read my articles regularly, you know that I rely on the work of Professor Stephen Penman and his book "Accounting for Value" for this. In this book, Penman walks investors through how they can apply the magic of high school algebra to a standard finance formula in order to work out what the market is "thinking" about a given company's future growth. This involves isolating the "g" (growth) variable in this formula. In case you find Penman's writing a bit dense, you might want to try "Expectations Investing" by Mauboussin and Rappaport. These two have also introduced the idea of using the stock price itself as a source of information, and then infer what the market is currently "expecting" about the future.
Anyway, applying this approach to C.H. Robinson at the moment suggests the market is assuming that this company will now grow profits at a rate of about 6% from here. That is excessive in my view, especially given the general collapse in the price of shipping we've seen recently. Given the fact that an enormous amount of debt is being rolled at a higher rate this year, and given that the shares are not objectively cheap, and given that shareholders would receive about 2.25% more from the risk-free rate than from the stock, I can't recommend buying these shares at the moment. I think the preservation of capital is of critical importance, and for that reason, I think capital would be better invested elsewhere.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within 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.
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Comments (3)
You're very welcome, and I've got to write that your username expresses my view on most days. Dogs have most of our virtues, and none of our vices.
Anyway, those are interesting questions, and I'm going to chew 'pon them if you don't mind. Rather than give a half assed answer, I'd ask you to please stay tuned, so I can give the answer my whole ass.
I do think re-shoring to North America is pretty much inevitable, for all of the reasons Zeihan, among others, suggest. I don't agree with everything he says, but he's right about stuff returning to North America.
Please stay tuned.
PD