Summary
- CHRW's Q4 revenue decreased 22% YoY due to weak truckload pricing and global forwarding market declines.
- Global forwarding revenue declined by 53%, NAST net revenue increased 6% due to increased gross profit margin.
- CHRW is a leader in the highway brokerage market with a vast network of shippers and carriers.
- It has a strong economic moat and valuable partnerships with shippers and carriers.
- Fair value is estimated at $90 per share, we suggest holding off until a more favorable opportunity.
Q4 Revenue Declines Despite Improved Margins
In the fourth quarter, C.H. Robinson Worldwide ( CHRW )'s revenue declined 22% YoY due to lower-than-anticipated truckload pricing and a sharp drop in the global forwarding market. The slowdown in retail sector restocking, with high inventory levels, resulted in a decrease in demand and customer pricing for truck brokerage and global forwarding. The NAST (Truck Brokerage) revenue experienced an 8.5% decrease due to lower volumes and pricing, while global forwarding revenue saw a 53% decrease. Despite this, the NAST net revenue still increased by 6% due to an expanded gross profit margin, and the global forwarding gross margin also improved. However, the overall net revenue still declined by 10%.
The overall adjusted net operating margin was significantly impacted by the declining global forwarding market and the lower margin from NAST. Nonetheless, NAST's margin improved by 310 basis points (excluding non-recurring costs) to 34.3%, while the global forwarding margin decreased to 18.7% from 47.4% the previous year. Despite a sequential decrease in margins for both segments, it was expected as normalization was anticipated to continue.
Company 4Q Earning Presentation
CHRW's Competitive Edge in the Asset-Light Highway Brokerage Market
As a leading player in the asset-light highway brokerage market with a broad network of shippers and asset-based truckers, CHRW holds a competitive advantage. Its variable-cost model has a strong track record of preserving profitability during freight downturns. With minimal transportation equipment and a large portion of expenses tied to performance-based variable compensation, the company is well-placed to benefit from consolidation in the truck brokerage sector. CHRW's future growth is expected to come from its ability to capture a larger share of the fragmented domestic freight brokerage market through share gains.
The network of asset-based truckload carriers should continue to hold value for shippers as truckload capacity remains limited by the shortage of drivers. The air and ocean forwarding unit of the company is also poised for growth as organic growth and tuck-in deals expand CHRW's global footprint. Lane density and increased buying scale are crucial for securing adequate capacity for shippers.
A Decade of Dominance in the Freight Industry
CHRW has a long history of outstanding performance in the freight sector, despite facing competitive challenges over the years. The company has managed to retain its market position and even grow its share of the truck brokerage market, with an estimated market share of 17%, up from 13% over the past decade. This strong track record of growth and execution is a positive indicator for potential investors.
Another advantage of CHRW is its asset-light operating model, which has consistently delivered superior returns on investment capital. Since 2013, the company has achieved an average ROIC of 26.3%, emphasizing its ability to operate efficiently and produce attractive returns for shareholders.
Company 10-K 2013 to 2022, calculated by the author
Navigating Uncertainty in a Shifting Truck Brokerage Market
The once booming truckload and LTL demand and pricing are now leveling off as the supply and demand balance in the industry. This market adjustment may result in a decline in the company's profits. The truck brokerage market is becoming more crowded, attracting new players such as startups, brokerage operations of asset-based carriers, and digital freight matching companies. This increased competition may put pressure on the company's profit margins and hinder their ability to achieve high returns on investment. Additionally, CHRW's truck brokerage gross profit margins are projected to be lower than their historical average during the mid-cycle, which may be a cause for concern for potential investors.
Company 4Q Earning Presentation
A Strong Economic Moat Built on a Vast Network of Shippers and Carriers
CHRW's network of shippers and carriers, which numbers over 40,000 shippers in North America and more than 60,000 asset-based carriers across various transportation modes, gives the company a competitive advantage and a strong economic moat. For shippers, CHRW's buying power enables it to offer lower transportation rates, resulting in cost savings and the ability to convert fixed costs into variable costs. Additionally, the company's relationships with air, ocean, and rail carriers provide shippers with access to a wide range of transportation options, allowing them to optimize their use of truckload, less-than-truckload, and rail intermodal, as well as air and ocean freight for overseas shipping. For carriers, CHRW offers a wealth of freight opportunities and access to a large customer base, reducing empty miles. The company's proprietary IT platforms, which are hard to replicate, provide differentiation from smaller providers and allow it to capture more market share as supply chains become increasingly complex. The technology infrastructure and vast market data also enhance internal pricing decisions, customer connectivity, and reporting.
Valuation
I estimate that CHRW's fair value per share is $90. The following table outlines the primary assumptions for this estimate. During 2023, I anticipate a decline in net revenue by 8% as demand and pricing reach a balance in the market. In the long run, I anticipate that CHRW will experience an average organic growth in net revenue of 3% over the course of the freight cycle, driven by growth in market share and modest increments in selling prices. I expect a modest decrease in margins due to the changes in demand and pricing dynamics discussed earlier.
Author estimates
At the price of $90, the multiples are slightly lower than historicals as shown below.
Company 10-K 2013 to 2022, Seeking Alpha and author estimates
Risk and Uncertainty
Despite its adaptable cost structure, CHRW may still face challenges during economic slowdowns resulting in a decline in freight volume and weakened pricing. Additionally, inflation and reduced consumer spending could negatively impact the company's near-term outlook.
During busy freight periods, the shortage of truckload capacity causes carriers to charge higher rates, causing temporary pressure on CHRW's profit margins as they pass on the higher costs to customers with a delay. In the future, a shortage of drivers may also cause capacity constraints. Although CHRW has limited environmental, social, and governance risks as it doesn't own transportation equipment, data security remains a concern. Furthermore, changes in fuel prices could also impact the company's profit margins.
A Legacy of Strong Capital Management and Operational Excellence
The balance sheet of CHRW is robust, with a strong performance in the freight brokerage market. The company has a record of efficient capital allocation leading to positive cash flow, high profit margins, and outstanding ROIC. CHRW distributes a quarterly dividend and has a history of share buybacks, as well as making selective acquisitions to enhance its operations. Bob Biesterfeld became CEO in early 2019 following John Wiehoff's retirement and stepped down at the end of 2022, with the board now searching for a new CEO and Scott Anderson serving as interim leader.
Conclusion
Despite the recent decline in fourth-quarter revenue, CHRW remains a dominant player in the freight industry. Its vast network of shippers and carriers, along with its non-asset-based operating model, provide a strong economic moat. Although the truck brokerage market is becoming increasingly competitive, the company is well-positioned to navigate this uncertainty and maintain its market position. The company's technology infrastructure and vast market data provide a competitive advantage that sets it apart from smaller providers. However, with a fair value estimate of $90 per share, I recommend staying on the sidelines until a better entry point.
For further details see:
A Look At C.H. Robinson's Future In The Truck Brokerage Industry