2023-05-12 15:11:49 ET
Summary
- The most recent financial performance has been subpar in my view. Revenue and net income are down dramatically from the year-ago period. Profitability is down relative to 2019.
- The shares are more expensive than they were when I last reviewed the name, and the spread between the dividend yield and risk-free rate has widened.
- Investors seek the highest returns at the lowest risk. In a world where treasury yields are decent, a stock must be very compelling.
It's been just under three months since I put out my latest cautionary note on C.H. Robinson Inc. (CHRW), and in that time the shares have returned a negative 1.1% return against a gain of about 3.5% for the S&P 500. I like underperformance, because it means that a stock may have moved from being too expensive, to reasonably priced. Since the company has reported earnings yet again, I thought I'd check back in on the company to see if it makes sense to buy at current prices. After all, a stock trading at $99 is a slightly better investment than the same stock when it's trading at $101. I'll review those financial results, and put them in the context of the current valuation. Even if the business has deteriorated, this may be an excellent investment if we can snag shares at a sufficiently cheap price.
The weekend is upon us, dear readers, and for that reason I can hope and assume that you have other things on your minds than my take on C.H. Robinson. For that reason, I want to give you the gist of my thinking in a single paragraph, so you'll have more time to do whatever fun thing you've got lined up for the weekend. You're welcome. I'm not going to be buying C.H. Robinson at current prices, and I would recommend other people avoid the name. The shares are even more expensive, in spite of the fact that the business has deteriorated significantly in my view. Although long term debt is lower, it's worth noting that this business is less profitable now than it was in 2019. In my view, this suggests that the extra revenue is, in some significant ways, irrelevant. If growing sales doesn't lead to growing profits, what's the point. In the relativistic world of investing, we're always looking for the alternative that generates the lowest risk and highest potential returns. Given that an investor can earn a risk free 4.7% return, why would they choose to embrace higher risk, and lower return? As I've reminded people incessantly recently-is there any other way to remind people, other than by being incessant?--we're no longer in the TINA world. There very much are viable alternatives to stocks, and so a given stock must be very compelling to get me excited.
Financial Snapshot
There's no way to sugarcoat the most recent financial performance here in my view. I think the financial results were fairly bad. When compared to the same period a year ago, revenue and net income were down by 32% and 57.5%, respectively. In spite of this, the company chose to raise the dividend again, by about 1%. For those who might fret that I'm comparing the most recent quarter to a particularly great time for the company, allow me to compare the most recent period to the most recent pre-pandemic period. Although revenue for the first quarter of 2023 was higher by about 23%, net income was down about 29%. I'll remind investors that net income is the source of all sustainable investor returns.
It's not all bad news at C.H. Robinson, though. Total debt has declined by about $293 million over the past year. That will have an obviously positive effect on interest expense, which was about twice this year what it was last year. The reduction in debt is a welcome relief in my view.
In my previous missive on this name, I observed that I'd be happy to buy this company at the right price because the dividend was well covered. The coverage is no longer as great as it was previously, with net income lower, and dividends higher. I'd be happy to buy this stock at the right price, but it'll have to be at a very reasonable price indeed.
The Stock
I understand that I've talked myself out of more than a few great investments by insisting that I only pay a reasonable price for a stock. On many occasions I've eschewed a stock because it was too expensive just before it jumps in price. While this is frustrating, I'd rather miss gains than risk losses by buying stocks that are overpriced. Put another way, I'm cautious because I've been given many painful examples of how a great company can be a terrible investment at the wrong price, and a business that I consider to be troubled, like C.H. Robinson for instance, can only be a good investment if you get the shares on sale. I'm also of the view that we should focus more on capital preservation than on reaching for returns at the moment. This is why I insist on buying cheap.
Additionally, I insist on buying stocks in general "on the cheap" because the performance of a given stock, is a function of the crowd's ever-changing views about the desirability of "stocks" as an asset class. If I'm worried about the overall appetite for stocks starting to deteriorate (I am), then a stock is going to have to pass through the eye of many more intellectual needles before I consider it.
The last thing I want to write about "stocks" in general is that the stock is often a poor proxy for what's going on at the company, and I think it's possible to profitably exploit this disconnect. In my view, the only way to successfully trade stocks is to spot the discrepancies between what the crowd is assuming about the future of a given company, and subsequent results. What I want to see in a stock that I take a long position in, is one that the crowd is somewhat pessimistic about that goes on to exceed expectations.
In my previous piece on C.H. Robinson, I appreciated the fact that the market was paying only about 13.7 times earnings, but I was cautious about this stock because the dividend yield was about 225 basis points below the risk free rate. If an investor is taking on more risk via stock ownership, they should be rewarded with a higher return in my view. Fast forward to the present, and here's the lay of the land. The shares are about 17.5% more expensive, and the spread between the dividend yield and the risk free rate has widened to about 245 basis points, per the following:
None of that inspires me to want to buy.
While I think ratios can be instructive, I also want to try to work out what the market is "thinking" about a given investment. If you read my stuff regularly, you know that the way I do this is by turning to the work of Professor Stephen Penman and his book "Accounting for Value." In this book, Penman walks investors through how they can apply some 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 opaque, 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 we can infer what the market is currently "expecting" about the future. Applying this approach to C.H. Robinson at the moment suggests the market is assuming that this company will grow earnings at a rate of 6% in perpetuity. I consider this to be a massively optimistic forecast, especially given the recent past. Given all of the above, I must recommend continuing to avoid this name.
For further details see:
C.H. Robinson: Still Avoiding The Stock As Revenue And Net Income Diverge In Q1