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Buffett-Munger Highlight Weekly Report - C.H. Robinson Worldwide Inc

January 31, 2011 | About:
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gurufocus

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Starting this week GuruFocus will highlight one company a week from Buffett-Munger Screener. This week we focus on CHRW.

Company Name: C.H. Robinson Worldwide Inc

Ticker: CHRW

Market Cap: $12.62 billion

Business Predictability: 5 STARS

Industry: Air Delivery & Freight Services

Description:

C.H. Robinson Worldwide, Inc. (C.H. Robinson) is a third party logistics company. It provides freight transportation services and logistics solutions to companies of all sizes, in a variety of industries. During the year ended December 31, 2009, C.H. Robinson handled approximately 7.5 million shipments for more than 35,000 customers. It operates through a network of 235 offices, which it calls branches, in North America, Europe, Asia, South America, Australia, and the Middle East. It has developed global multimodal transportation and distribution networks to provide logistics services worldwide. C.H. Robinson does not own the transportation equipment that is used to transport its customers’ freight. Through its contractual relationships with approximately 47,000 transportation companies, including motor carriers, railroads (primarily intermodal service providers), air freight and ocean carriers, it selects and hires the appropriate transportation to meet its customers’ freight needs.

Analysis:

C.H. Robinson is a great example of how business innovation can increase economic productivity and create a wonderful, wealth creating business model. CHRW is in the transportation business, but unlike the typical transports, this company produces extraordinary economic profits. Furthermore, in addition to producing bottom line profits, the business throws of a tremendous amount of cash flow year after year. Below is the past five year’s statement of cash flows;

Period End Date 12/31/2009 12/31/2008 12/31/2007 12/31/2006 12/31/2005
Net Income/Starting Line 360.83 359.18 324.26 266.93 203.36
Depreciation/Depletion 30.51 31.16 27.37 23.93 18.5
Deferred Taxes -0.63 2.95 -8.92 -8.88 -0.5
Non-Cash Items 38.21 35.39 45.06 54.46 37.49
Changes in Working Capital -56.35 18.9 -79.34 6.95 -34.74
Cash from Operating Activities 372.57 447.58 308.43 343.38 224.11
Capital Expenditures -34.47 -23.75 -43.71 -43.24 -21.82


Notice the large amount of consistent free cash flow (CFO minus capital expenditures). This is very unusual for a transportation company. But CHRW is really a logistics company rather than transport. A normal transport such as trucking or railroad companies will own the trucks and rail cars. This leads to a very ‘asset heavy’ capital structure. It also requires a great deal more capital expenditures to maintain and build out its fleet. CHRW, on the other hand, is considered to be ‘asset light’ simply because it doesn’t own these assets. Rather, the company arranges logistic support acting as an intermediary between the shipper and the hauler. They enjoy a wonderful competitive advantage due scale, advanced database network, and strong relationships. Customers (specifically for small operators) pay for the increased efficiency for their shipping requirements. The efficiency savings for its customers more than offsets the fees charged. This increased ROI creates a compelling service offer for CHRW. The result is a company with superior profitability and cash flow. The business predictability of earnings is incredibly high with a five star ranking. As the global economy expands with international trade, the need for their services will grow as well.

Valuation:

Ratios – P/E (ttm) 32.6X

P/S 1.4X

P/B 10.7X

EV/EBIT 20.4X

Discounted Cash Flow Analysis – The market is currently placing a hefty premium on CHRW due to its above average consistency. Given current profit expectations and capital structure, the market is pricing in +20% growth over the next 10 years to justify its current share price – a very difficult hurdle.

Financials:

BV/ Share ROE ROA

12/09 $6.46 33.4 19.7
12/08 $6.50 32.4 19.8
12/07 $6.10 31.1 17.9
12/06 $5.47 28.3 16.4
12/05 $4.51 26.1 14.6
12/04 $3.64 22.1 12.7
12/03 $3.04 20.7 11.8
12/02 $2.52 21.1 11.6
12/01 $2.11 23.6 12.3


Current Developments:

- C.H. Robinson Worldwide Fourth Quarter 2010 Earnings

C.H. Robinson Worldwide, Inc. (“C.H. Robinson”) (CHRW), will hold its quarterly conference call to discuss fourth quarter 2010 results on Tuesday, February 1, 2011, at 5:00 p.m.

- C.H. Robinson Worldwide, Inc. Increases Its Quarterly Cash Dividend

C.H. Robinson Worldwide, Inc. announced that its Board of Directors declared an increase to its regular quarterly cash dividend from $0.25 per share to $0.29 per share.

Risk:

- Valuation

- Economic exposure / cyclicality

- Competitive pricing inputs

- Rising costs

Conclusion:

The company’s future will depend on the growth of the global economy and the company’s ability to execute and provide superior service. Due to the firm’s significant moat, competitive threats will be minimized. CHRW is the largest domestic truck broker in the United States and gets almost 75% of its revenue from this source. In order to continue extraordinary growth, the company will need to be able to penetrate international markets. Therefore, the growth will be much more cyclical than in years past. Also, the company must be able to pass along rising costs such as fuel and tariffs. If unable to do so, profit margins will suffer. The shares are fully valued and pricing in success for the future. Any disruption to their growth and the valuation will contract.

The Buffett-Munger screener is designed to find Buffett-type investments with extraordinary profitability, consistency, and future prospects. Our monthly Buffett-Munger Best Bargains Newsletter picks one stock from the screener. Our in-depth analysis shares with you why younger Buffett and Munger would like this stock. If you are a premium member, you can download it here. If you are not, we invite you for a 7-day Free Trial.

About the author:

gurufocus
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.5/5 (19 votes)

Comments

Adib Motiwala
Adib Motiwala - 3 years ago
It appear that the valuation is very rich at a cursory glance from the various metrics.

EV = 12B for a company that has FCF of $300-$400 million in last 2-3 years.
graemew
Graemew - 3 years ago
This stock seems a very risky investment indeed if the market is pricing in 20% annual growth for the next ten years. I would consider it a highly speculative investment and I am not convinced at all about the its competitive moat. I would rather read about lower growth companies unappreciated by the market.
ranjitsudan
Ranjitsudan - 3 years ago
I agree. Optimism already priced in the share price. Even a small miss in annual growth/earning will see this fall. I probably wait and see if market correct this stock to a reasonable valuation.
ranjitsudan
Ranjitsudan - 3 years ago


rob.will
Rob.will - 3 years ago
Looks fairly expensive to me... i say put it on a watchlist and wait for the price to come down, or if its such a great business the value to come up.

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