2023-06-27 09:31:33 ET
Summary
- C.H. Robinson Worldwide is a leader in the international logistics market, with potential for further growth through data analytics initiatives, headcount growth, and successful integration of acquisitions.
- The company faces risks from high competition, exposure to fuel price fluctuations, and reliance on third parties, but has a strong client base and international scope to support growth.
- Despite concerns about the total amount of debt, Robinson's positive free cash flow could lead to increased stock demand and higher trading prices.
C.H. Robinson Worldwide, Inc. ( CHRW ) appears to be a worldwide leader in the growing international logistics market and is executing meaningful initiatives in data analytics. In my view, a further increase in the headcount growth, successful integration of recent acquisitions, and retirement of some senior notes could bring further demand for the stock. There are relevant risks coming from supply chain issues and monitoring of accounts receivable, however, I believe that the stock could trade at higher price marks.
Robinson
Robinson Worldwide is one of the largest logistics companies globally. The company reports the delivery of more than 20 million loads toward more than 100k clients. The services offered include the automation of transfers and a technological innovation in this type of service for its clients , located in South America, Europe, Asia, North America, and Oceania.
For starters in this sector, I believe that the most interesting thing about Robinson is the type of clients that chose to work with the company. Among the 100k customers, there are massive blue chips and large international conglomerates. Many clients are part of the Fortune 500 catalog, but there are also small companies with national or regional businesses.
C.H. Robinson | Third Party Logistics (3PL) & Supply Chain Management
A large part of its operations is supported by companies that provide transportation services, which were, for the last year, more than 95k to meet all deliveries. These logistics services come with services related to distribution assembly for companies, services for special loads, advice, and reporting of activities among others.
In addition, Robinson participates in the market for the distribution and supply of food products such as fruits and vegetables. With 100 years of experience in the logistics business, the company has in its favor a distribution and transport network, and it serves clients mainly in the gastronomic field or retailers of these products, to whom it also offers the service of the strategy for logistics, replacement, and reporting of the status of the products in each of the stores.
Operations are divided into two segments: transportation in North America and global operations. The first of these segments is mainly made up of cargo transportation and logistics services in the United States, Mexico, and Canada, while the international operations encompass distribution and logistics operations through offices in the aforementioned continents. In addition, Robinson operates its fruit and vegetable distribution business under the Robinson Fresh name.
I Am Not Afraid Of The Total Amount Of Debt
In the last quarter, the total amount of assets decreased driven mainly by decreases in accounts receivable. It is beneficial that the total amount of cash in hand increased in 2023. I believe that Robinson may try to receive more cash to pay the total amount of current debt, or in order to renegotiate with debt holders.
As of March 31, 2023, the company reported cash and cash equivalents worth $239 million, receivables of about $2.681 billion, contract assets close to $191 million, and prepaid expenses worth $122 million. Total current assets are equal to $3.234 billion, a bit larger than the current amount of liabilities. There does not seem to exist a liquidity issue.
With property and equipment of $160 million, goodwill close to $1.470 billion, and right-of-use lease assets worth $357 million, total assets were equal to $5.595 billion. The asset/liability ratio is larger than 1x, so I would say that the balance sheet appears quite stable .
The list of liabilities includes accounts payable worth $1.411 billion, outstanding checks of close to $71 million, and current lease liabilities of about $72 million. The long-term liabilities include long-term debt of $920 million, noncurrent lease liabilities of $301 million, and total liabilities of $4.214 billion.
Given the forward FCF of more than $700 million, I do not think that the total amount for the long term does not really represent a problem. In my view, Robinson will most likely be able to find new financing.
10-Q
Market Expectations
Expectations from other market participants include net sales growth in 2023, 2024, and 2025, EBITDA growth, and net income growth. 2025 net sales would be close to $20.276 billion, with 2025 EBITDA of $946 million, 2025 EBIT of around $860 million, an operating margin of 4.24%, and 2025 net income of $622 million.
marketscreener.com
DCF Model
I do believe that the year 2023 may be a bit challenging. The recent decrease in net sales and accounts receivable was relevant in the Q1 2023. With that, I believe that further monitoring of credit risks and the quality of accounts receivable will most likely enhance FCF growth in the coming years. Robinson discussed these initiatives in the last quarterly report.
The prior year was impacted by increasing net operating working capital due to increasing pricing and volumes in nearly all services, most notably in global forwarding, which resulted in a net use of cash for operating activities in the first quarter of 2022. We continue to closely monitor credit and collections activities and the quality of our accounts receivable balance to minimize risk as well as work with our customers to facilitate the movement of goods across their supply chains while also ensuring timely payment. Source: 10-Q
I also believe that further repurchase of shares and reduction of the debt levels could bring further interest from investors. As a result, I believe that we could see an increase in the EV/FCF multiple expected by market participants. In this regard, the following lines from the last quarter are quite relevant.
To the extent we reduce our outstanding debt on these facilities or our other debt facilities, it may reduce the number of shares we repurchase in 2023. Over the long term, we remain committed to our quarterly dividend and share repurchases to enhance shareholder value. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. We may seek to retire or purchase our outstanding Senior Notes through open market cash purchases, privately negotiated transactions or otherwise. Source: 10-Q
Under my financial model, I included several conditions which would most likely lead to revenue growth in the next ten years. I assumed that economies of scale, offering a growing number of products and services offering speed, and successful supply chain solutions will represent relevant revenue catalysts.
Besides, I assumed that successful data analysis will become more and more important as big data processing and artificial intelligence develop. In my view, if management successfully adapts its IT systems to offer better solutions, we could expect further efficiency, flexibility, and FCF margin expansion. In this regard, I believe that investors would do good by having a look at the following lines about the Navisphere platform from the last annual report.
We have one of the largest datasets of shipments, routings, and carriers in the world. We use our data and data analysts to drive smarter solutions and products for our customers. Navisphere, our proprietary technology, provides flexibility, global visibility, customized solutions, easy integration, broad connectivity, and advanced security. Source: 10-K
In addition, taking into consideration the previous premise, I believe that hiring more data scientists and engineers will most likely enhance decision-making and may enhance efficiency. The headcount growth stood at close to 3% in the past. I believe that future headcount growth would not be far from that figure.
YCharts
With approximately 1,300 data scientists, engineers, and developers, we are continuing to make smart, talent-focused investments globally in this critical area and building the next generation of tools and processes that will change how supply chains function. Source: 10-K
Finally, I believe that internationalization of the business model will most likely continue to offer substantial growth opportunities. According to expertise, the global connected logistics market grows faster than the U.S. retail logistics market.
The U.S. retail logistics market size was valued at USD 43.17 billion in 2021 and is expected to expand at a compound annual growth rate of 11.0% from 2022 to 2030. Source: U.S. Retail Logistics Market Size & Share, 2022 - 2030
The global connected logistics market size was valued at USD 29.72 billion in 2022, and is expected to expand at a compound annual growth rate ((CAGR)) of 14.5% from 2023 to 2030. Source: Global Connected Logistics Market Size & Share Report, 2030
Using numbers obtained from the expectations of other analysts, the median net margin of close to 3.39%, and net sales growth median of 4.29%, I assumed growing net sales growth. Besides, net income would increase from 2023 to 2024 as well as the CFO and FCF.
marketscreener.com
In particular, I would obtain 2033 net sales of $28.374 billion, 2023 net income of $961 million, depreciation and amortization close to $54 million, stock-based compensation worth $229 million, changes in accounts receivable of $1.505 billion, and changes in accounts payable close to -$417 million. Besides, with accrued compensation of about $91 million and accrued transportation expense of about -$1.663 billion, I also included changes in other assets and liabilities of about -$152 million. I believe that my figures are quite conservative.
For the calculation of the terminal 2033 EV/FCF, I used the EV/FCF 10 years median of about 24x-25x. With the mentioned EV/FCF, 2033 CFO of close to $1.278 billion, and capex of -$291 million, 2033 FCF would be $987 million.
YCharts
Besides, with a WACC of 8.34%, the enterprise value would be $14.734 billion. If we also add cash and cash equivalents close to $239 million and subtract long-term debt of $920 million and the current portion of the debt of $952 million, the equity valuation would be $13.1 billion, and the fair price would be $114 per share.
I Believe That The Company Is Superior To Its Competitors
Even though it appears to be one of the largest international logistics service companies, Robinson operates in a highly competitive market in which there are different types of agents that do not necessarily offer the same number of services as the company. This includes, in addition to traditional logistics companies, companies that offer digital services for the creation of strategy and supply chain management, transport companies, brokers, and cargo owners among others.
In any case, due to the experience and recognition of the company as well as the network and relationship with its clients, the international scope of its services, the scale in this sense, and the values ??of information and technology that the company has, in my view, Robinson will most likely experience growth in the field of logistics and the distribution of fruit and vegetable products.
Risks
Among the risks that exist for the company, we must take into account the high competition in the sector, the exposure to fluctuations in fuel prices for transport, the volatility of international operations, and the great dependence that the company has on third parties.
I also believe that the integration of recent acquisitions as well as the retention of head talent are also risk factors to take into account in the case of this company. If management has to deliver goodwill impairments, or headcount growth does not increase as expected, in my view, future earnings expectations would most likely lower.
Regarding legislation, a risk is always present in local regulations for the operations of foreign companies as well as possible future changes in the legislation on the use of fuel for transport. If the company needs to make larger capital expenditures to respect the new regulatory regime, shareholders may enjoy less FCF growth.
Lastly, I do believe that the total amount of financial debt may cause problems or complications in accessing lines of credit to make further investments and developments. Besides, some shareholders may decide to sell their shares as they may not appreciate the total amount of leverage. I am not really worried about the total amount of debt because Robinson delivers positive FCF, however, conservative investors may not appreciate it.
Conclusion
Robinson appears to be a leader in the global logistics market. Besides, the company offers a diversified portfolio of products and appears to be monitoring closely the quality of the accounts receivable in 2023. In my view, further investments in data analytics, headcount growth, the promised reduction of debt levels, and stock repurchases could bring attention from investors and stock demand. Even considering risks from the supply chain, the total amount of debt, or changes in the legislation, I believe that Robinson could be trading at a larger pace.
For further details see:
C.H. Robinson: Data Analytics Could Be A Game Changer For Logistics