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CHRW AT A GLANCE

P/E ► 25.9 AVG EV/EBITDA ► 16.0 AVG ROA ► 19.2% HIGH ROE ► 32.8% AVG Debt to Equity ► 0.638 AVG Current Ratio ► 1.91 AVG

 

 

 

 

 

 

C.H. Robinson (NASDAQ:CHRW) transports goods using third-party trucks, planes, ships, and railcars. Holding contracts with 45,000 transportation companies, C.H. Robinson shipped over 5 million packages for approximately 25,000 customers in 2006.^[1]

Unlike trucking firms such as YRC Worldwide (YRCW) and Conway Inc (CNW), C.H. Robinson does not use company-owned trucks to move goods for customers. Instead, employees in any of the firm's 200+ branch offices contract with third-party trucks to move food and beverage, manufacturing, and retail goods.^[2] The transportation of goods was 88% of 2006 gross profits; the balance of revenues come from distributing fresh produce, and its T-Chek Service Unit which provides management services to the trucking industry^[3].

C.H. Robinson's non-asset based model saves money, as it does not need to purchase its own expensive trucks, planes, or ships. The company can choose from a variety of carriers to move goods, and it can adjust its shipping capacity by controlling the number of third-party contracts which it enters. This protects it against lower trucking usage in the event of a recession - when companies ship less in response to lower consumer spending, CHRW adjusts its capacity to meet lower shipping demand. While the company is not as vulnerable to an economic recession as asset-based trucking firms, total volume decline in shipments still hurts profits. Also, by not operating its own transportation equipment, C.H. Robinson depends on securing third-party services to make money, an additional risk factor that asset-based firms do not deal with.^[4]

Business Overview

C.H. Robinson generates profit by moving goods, buying and selling produce, and providing information services to the trucking industry. Customers vary from family-owned stores to large Fortune 100 companies. No customer accounts for more than 3% of total revenue^[5]. CHRW facilitates movement of goods primarily by acting as a middle-man between shipping customers and third-party transportation carriers. C.H. Robinson will charge customers higher rates (which depend on volume and weight) than it negotiates with its network of third-party transportation companies - this is the source of its operating margin.

Transporting Goods

C.H. Robinson makes most of its money by moving goods. The salespeople of C.H. Robinson build relationships with the customers whose goods C.H. Robinson moves, as well as the carriers that do the transportation. CHRW charges shipping customers to move their goods, and then pays carriers at spot-market rates to move the product (the difference is profit). The 200+ branch offices allow management of C.H. Robinson to assess local market conditions and build face-to-face business relationships^[6]. This business model relies heavily on salespeople who can solicit and manage customers, and C.H. Robinson attracts this talent using performance-oriented compensation to reward salespeople. Compensation was the largest expense in 2006. The performance-oriented pay can help lower expense in weak U.S. Economic Cycles^[7].

Fresh Produce Sourcing

C.H. Robinson actively buys produce from farmers and then arranges specialized transportation of the fruits and vegetables to food wholesalers, grocery stores, and restaurant chains. C.H. Robinson provides clients with quality control from store-to-store and region-to-region. In addition, C.H. Robinson markets its own brand 'Fresh 1', which has expanded its relationship with retail customers. C.H. Robinson profits when it can sell the produce for more than it cost to buy and move the produce to the customer^[8].

Information Services

T-Chek Inc, a subsidiary of C.H. Robinson, offers motor carriers and truck stops fuel management, driver payroll, and other related services. Using C.H. Robinson proprietary system, customers can tract equipment, manage fleets, and dictate where and when a truck can stop for fuel for a fee. T-Chek also captures fuel and cost data, and customers pay for access to the information^[9].

Each Segment's Contribution to Gross Profit

The following table^[10] indicates the amount of gross profit for each of the three business segments. The data compares the first nine months of 2007 with that of the same period in 2006. The transportation segment is subdivided by mode.

All segments experienced an increase in total profits. Overall profit margins expanded from 16.4% for the first nine months of 2006 to 17.2% during the same period in 2007. The majority of this rise was due to an increase in transportation profit margins. Trucking benefited from the available truckload capacity, which more than offset the slight decrease in rates charged to customers (softness in overall demand for shipping led to the decrease). Intermodal total profits rose in-line with revenue growth. C.H. Robinson obtained new customers in both ocean and air freight, which resulted in higher gross profits for this subdivision. Higher produce market prices, which resulted from weather issues during the growing season, led to a 0.1% decline in profit margins, but overall revenue growth supported the 6.5% rise in total gross profits. Information Systems benefited from increase transaction volume and higher prices charged to truck stops for services^[11].

Financials Overview

C.H. Robinson has not used long-term debt to finance operations, nor does it have any commitment to a defined benefit plan. Management tries to achieve a 15% annual growth rate for income from operations, gross profit, and earnings per share, which is based on analysis of the company's performance over the past 20 years^[12]. The company upped its dividend from 18 cents to 22 cents per quarter in November of 2007^[13]. The following graph shows that revenue and operating income increased over the past five years. ^[14] As one can see in the Operating Metrics table, employee growth, branch office expansion, and average gross profits per employee have trended with revenue growth.

Operating Metrics^[15]

Growth has been achieved through acquisitions, expansion of new customers, and price increases.

Key Trends & Forces

• Movement to full-service transportation services: Transportation companies are increasingly implementing and expanding a logistics arm to complement their existing transportation business. YRC Worldwide (YRCW) uses its subsidiary YRC Logistics, and likewise Conway Inc (CNW) uses its Menlo Logistics branch. C.H. Robinson depends on buying available cargo space from third-party carriers, but these carriers are increasingly funneling business to themselves through their own logistic branches. This cuts out the middle man (CHRW) and results in a more competitive environment for C.H. Robinson.

• Sensitivity to Economic Conditions: A slowing U.S. Economy would result in lower shipping tonnage. This would lead to lower prices - which on the one hand would benefit CHRW because it pays lower rates to third-party carriers, but on the other hand it will have to charge lower rates to shipping customers. In addition, overall reduction in freight volume from customers (particularly food, beverage, paper, or printing industries) could translate to less revenue being generated. The blue line in the 'TSI Image' shows the U.S. Transportation Service Index. The Index measures the movement of freight. As one can see, during weaker GDP periods (early 90's, 1995, and 2000-01), total freight shipments were down to flat.

• Dependency on Third-Party Equipment and Services: C.H. Robinson does not own the trucks, ships, planes, or railcars that it uses to transport goods. The company agrees to ships goods and contracts out the work. While C.H. Robinson uses over 45,000 carriers, most of which are smaller companies, disruption of or lack of access to carriers could impact shipments of C.H. Robinson's customers. Subsequently, customers may opt to temporarily or permanently use another transportation company^[17].

• Fresh Produce Risks: The Sourcing segment of C.H. Robinson is exposed to a few risks. Should the supply of fresh produce decline, it may be difficult and/or costly for C.H. Robinson to deliver produce to its customers. Moreover, should any recall or allegation of contamination arise, C.H. Robinson would likely be responsible to remove, transport, and destroy the crop. Its brand image, especially Fresh 1, may be tarnished and result in a decrease in sales. The company is insured up to $100 million for product liability claims^[18].

• Attracting and Retaining Employees: Employee growth and retention is important for the expansion of C.H. Robinson (worker compensation is its largest expense). The company's non-asset based model depends on autonomous offices that build strong relationships with local customers and carriers. C.H. Robinson plans to increase branch offices and needs qualified salespeople and logistic managers to run successful businesses. In addition, the technology staff, which develops the proprietary information systems, must be able to adapt the system to customer's needs^[19].

Competition

C.H. Robinson competes with a large number of non-asset and asset based freight service and logistic firms, third party freight brokers, and freight forwarders. Asset based logistic companies, which own transportation vehicles, include YRC Worldwide (YRCW) and Conway Inc (CNW). Non-asset logistics, like C.H. Robinson, do not own ships, planes, or trucks, and include Expeditors International of Washington (EXPD), UTi Worldwide (UTIW), and Pacer International (PACR). These firms compete for shipping orders and logistic management from customers primarily based on price, reliability, and breadth of services available.

Air Delivery & Freight Service^{[20][21][22][23][24][25]}

• 143 if one adds 78 countries with only independent-offices being ran

Competitive Strengths

Management of C.H. Robinson believes its non-asset base business model gives the company flexibility in servicing the needs of clients. Moreover, management believes the total logistics and proprietary information services available to clients give the firm some economic moat. Other competitive advantages cited are working relationships with numerous clients, and local market knowledge obtained through its branch network system^[26].

References

1. ↑ C.H. Robinson (CHRW) Form 10-K, Fiscal Year 2006, "Our Customers", Page 8
2. ↑ C.H. Robinson (CHRW) Form 10-K, "Our Business Model", Page 10
3. ↑ C.H. Robinson (CHRW) Form 10-K, Fiscal Year 2006,"Our Company", Page 9
4. ↑ C.H. Robinson (CHRW) Form 10-K, Fiscal Year 2006,"Risk Factors", Page 11-13
5. ↑ C.H. Robinson (CHRW) Form 10-K, Fiscal Year 2006,"Our Customers", Page 10
6. ↑ C.H. Robinson (CHRW) Form 10-K, Fiscal Year 2006, "Our Branch Network", Page 10
7. ↑ Seeking Alpha
8. ↑ C.H. Robinson (CHRW) Form 10-K, Fiscal Year 2006, "Sourcing", Page 5
9. ↑ C.H. Robinson (CHRW) Form 10-K, Fiscal Year 2006, "Information Services", Page 5
10. ↑ C.H. Robinson (CHRW) Form 10-Q, 3Q Fiscal Year 2007 "Results of Operations", Page 12
11. ↑ C.H. Robinson (CHRW) Form 10-Q, 3Q Fiscal Year 2007 "Nine Months", Page 14
12. ↑ C.H. Robinson (CHRW) Form 10-Q, 3Q Fiscal Year 2007 "Our Goals", Page 11
13. ↑ Yahoo! Finance
14. ↑ C.H. Robinson (CHRW) Form 10-K, Fiscal Year 2006, "Statement of Operations Data"
15. ↑ C.H. Robinson (CHRW) Form 10-K, Fiscal Year 2006, "Operating Data"
16. ↑ Bureau of Transportation Statistics
17. ↑ C.H. Robinson (CHRW) Form 10-K, Fiscal Year 2006,"Risk Factors", Page 11-13
18. ↑ C.H. Robinson (CHRW) Form 10-K, Fiscal Year 2006,"Risk Factors", Page 11-13
19. ↑ C.H. Robinson (CHRW) Form 10-K, Fiscal Year 2006,"Risk Factors", Page 11-13
20. ↑ Hoovers
21. ↑ Yahoo! Finance
22. ↑ CHRW Company Website
23. ↑ Hoovers
24. ↑ Hoovers
25. ↑ PACER International (PACR) From 10-K FY 2006, "Our Service Offerings" Page 4-6
26. ↑ C.H. Robinson (CHRW) Form 10-K, Fiscal Year 2006,"Competition", Page 8-9