2023-09-06 21:14:34 ET
Summary
- C.H. Robinson is a third-party logistics company that connects people who need things moved with transportation providers.
- CHRW's weakened earnings outlook can be primarily attributed to the challenging conditions in global freight markets. These conditions include weak demand, high inventories, and excess capacity.
- The company's new CEO, Dave Bozeman, brings significant industry experience and is expected to navigate these challenges.
- CHRW's projected intrinsic value is $128.45, indicating a potential 44.9% total return compared to the current share price.
Intro
Let's break down what C.H. Robinson ( CHRW ), a top-notch third-party logistics company , however, they don't own trucks or ships themselves. Instead, they're experts at connecting people who need things moved with the folks who can do it.
Now, most of their sales, around 60% in 2022, came from helping arrange truck shipments, and they also handle some train-based shipping. But that's not all they do. They've got a big chunk of their business, about 30%, dedicated to shipping items on airplanes and ships and sending them around the world. This part of the company has grown over time through both organic growth and purchasing other businesses.
The rest of their income comes from their European truck-brokering work, helping people manage their transportation, and a part of their business that's been around for a while, sourcing produce.
In our analysis, we're going to dig deep into CHRW's financial performance and see where they might be headed. We'll look at how the company makes money, how much they're making compared to their costs, and how they handle their cash. By getting a better grasp on the company, you'll be in a good position to decide if investing in CHRW is a smart move.
Performance
Before investing in a stock, it's essential to check the company's history of growth and profitability. It helps you gauge the company's strength, manage risk, and make smarter investment choices. CHRW has shown steady revenue growth over the last decade, with their revenue increasing from $12,752 million in 2013 to $24,697 million in 2022. This represents a total growth of approximately 93.67% over the ten-year period, with a compounded annual growth rate ((CAGR)) of about 6.83%.
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In terms of free cash flow, CHRW's numbers have been more variable. They started at $299.57 million in 2013, experiencing fluctuations in subsequent years. By 2022, their free cash flow had reached $1,585 million, reflecting a total growth of approximately 429.09% over the decade, with a CAGR of about 18.13%. This indicates varying levels of cash generation over the years, which is essential to sustaining and growing the business.
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CHRW remarkable growth story can be largely attributed to the strength of its global network. With a vast presence across the world, CHRW can offer tailored logistics solutions to customers, regardless of their location. This expansive network not only provides access to a skilled and multilingual workforce but also acts as a risk mitigation strategy by diversifying exposure to potential disruptions. Moreover, CHRW leverages its global network to optimize operations, reduce costs, and swiftly adapt to evolving market dynamics, such as the surge in e-commerce and the growing demand for sustainable logistics solutions.
CHRW strong global network has allowed the company to consistently demonstrate impressive profitability, with an average 10-year Return on Equity of 40.49%. This metric reflects the company's ability to generate substantial returns on shareholders' equity, showcasing its efficiency in utilizing investor capital. In comparison, the sector median ROE stands at a significantly lower 13.81%. This stark difference highlights CHRW's outperformance within its industry. In essence, CH Robinson Worldwide Inc. has consistently delivered strong profitability, significantly surpassing the sector average, making it an attractive choice for investors seeking companies with a robust financial track record.
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Unfortunately for long term investors of the CHRW, this stellar financial performance hasn’t led to satisfying returns. Over the past 5 years, CHRW has experienced a total return of just 3%. This return includes both stock price appreciation and any dividends received during that period. In comparison, the broader market, represented by the S&P 500, saw a much more robust total return of 70% over the same timeframe leaving investors questioning if CHRW can turn things around.
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Outlook
Looking ahead it appears CHRW is in for a bumpy ride. For the fiscal period ending in December 2023, CHRW is estimated to have earnings per share of $3.69. This represents a significant year-over-year (YoY) decline of approximately -51.53%. In terms of revenue, the company is expected to generate around $18.06 billion for the same period, which reflects a YoY revenue decline of approximately -26.88%. These estimations indicate a challenging outlook for CHRW in the fiscal year ending December 2023, with a notable decrease in both earnings and revenue compared to the previous year.
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CHRW's weakened earnings outlook can be primarily attributed to the challenging conditions in global freight markets. These conditions include weak demand, high inventories, and excess capacity, which have created a fiercely competitive marketplace. As a result, transportation rates have been suppressed, impacting the company's ability to generate higher revenues.
Furthermore, the North American freight volumes and load-to-truck ratios are reminiscent of the low levels observed in 2019, indicating persistently subdued demand. In the freight forwarding market, the excess capacity in ocean vessel and air freight continues to outpace demand, leading to low freight rates. This trend has been ongoing since the latter half of 2022, further hindering CHRW's revenue potential.
Adding to the challenges, the expected influx of new vessel deliveries in the ocean market suggests that excess capacity is likely to persist for several periods. Even though steamship lines have made efforts to manage capacity through measures like blank sailings, slow steaming, and redeployment, these factors collectively contribute to the difficult operating environment that CHRW faces.
While the company faces significant headwinds affecting its industry, CHRW is focusing on providing outstanding customer service and driving down cost. CFO Mike Zechmeister shared his thoughts on the matter during the company's most recent earnings call ,
We are staying focused on what we can control, providing superior service to our customers and carriers and streamlining our processes by removing waste and manual touches. The result has been meaningful cost reduction and productivity gains across our business.
Joining the fight to help get the company back on the right track is CHRW's new CEO , Dave Bozeman, who brings over 30 years of experience from industry-leading companies, including Ford (F) and Amazon (AMZN). He's known for successfully managing both immediate challenges and long-term strategies. His expertise spans supply chains, middle-mile transportation, manufacturing, digital innovation, and customer service.
Notably, at Amazon, Bozeman played a key role in expanding the company's global transportation operations and introducing innovative solutions to the company's most complex issues. His diverse experience equips him to address CHRW's challenges and steer the company toward a successful turnaround, making him a crucial figure to watch in the logistics industry.
Valuation
To determine CHRW's intrinsic value, we will perform a discounted cash flow analysis. This analysis allows us to estimate the stock's true value based on future cash flows.
We'll begin with the company's initial free cash flow in 2022, which is $1.58 billion. We'll estimate growth rates for the next few years based on analyst insights from the outlook section above. For 2023, we have a growth rate of -51.53%, followed by 19.38% for 2024 and 16.31% for 2025.
Now, for the subsequent phase of our DCF analysis, we usually use the average compounded annual growth rate of revenue and free cash flow over the past decade, which is over 12.48%. However, we believe it's unrealistic for CHRW to grow at this rate for the better part of two decades. Therefore, to be more conservative, we'll use a growth rate of 7% for these years.
We'll employ a discount rate of 10%, representing the market's average return with reinvested dividends. Additionally, we need a perpetual growth rate, indicating how much the company will grow indefinitely after year 10. Here, we'll use a conservative estimate of 2.5%.
After running the numbers, CHRW's projected intrinsic value comes out to be $128.45. This is our estimate of what the stock should be worth based on our analysis, suggesting a potential total return of 44.9% compared to the current share price.
Takeaway
While CHRW has shown steady revenue growth and strong profitability, their recent returns haven't been impressive. The company faces challenges in global freight markets, leading to a projected decline in earnings and revenue for the rest of 2023. However, CHRW's new CEO, Dave Bozeman, brings significant industry experience and is expected to navigate these challenges.
Despite these challenges, CHRW's projected intrinsic value is $128.45, indicating a potential 44.9% total return compared to the current share price. The current valuation suggests long-term upside potential, making a buy rating reasonable.
For further details see:
C.H. Robinson: Navigating Challenges And Opportunities