History: In 1905, Charles Henry Robinson, a native of New York, incorporated CH Robinson (CHRW, Financial) in Dakota. He moved to Dakota when the railroads were laid out and he set himself to solve the problem of transporting merchandise, vegetable and fruits before they spoil. The best transportation at the time was horse and buggy and this complicated problem set the tone for the company - hardworking, flexible and service oriented. The history of CHRW parallels the history of transportation in the U.S.
After the death of the founder, the shares of the company were bought by Nash Brothers from his widow. In 1935, produce transportation was deregulated and soon CHRW started transporting it, mainly by railroad.
1968 Entered the regulated trucking industry
1976 Employees of CHRW buy out the Nash brothers and the company becomes 100% employee owned
1979 CHRW adopts IBM’s mainframe technology for information sharing, and electronic communication to aid its business
1984 Enters the contract career industry and after selling ROBCO Transportation Inc. in 1986, becomes a non-asset-based third-party provider
1997 Becomes publicly traded
1998 Acquires Preferred Translocation Systems, a non-asset-based third-party LTL company, and Comexter Group, a South American transportation and freight forwarding firm; also launches a customer track and trace website. Its network becomes 100 branches strong.
2003 Expands to Hong Kong and acquires third-party logistics company M. Viet GmbH based in Hamburg, Germany
2004 Acquires Dalian Decheng Shipping Agency and expands to mainland China
2006 Expands to India by acquiring Triune Freight Private Ltd.
2011 Annual sales reach $10 billion
2012 Acquires Apreo Logistics based n Warsaw, Poland, and sells its payment services business, T-Chek Systems to Electronic Funds Source LLC
2 Business
The company is a provider of transportation services and logistics solutions and operates through a network which spans North America, Europe, Asia, South America and the Middle East. The company is a non-asset-based provider. That is, they do not own any of the transportation equipment but only a few warehouses to aid the transportation of their customers' freight. The company works with approximately 53,000 transportation companies worldwide.
Being a service-based company, it uses its network and bookkeeping to offer other services like supply chain analysis, freight consolidation and program management.
The company provides following services: Truckload (customer uses the whole truck), Less than Truckload (customer provides a part of the shipment, the rest needs to be taken from other customers), Intermodal (shipment by a combination of trucks and rails), Ocean, Air, Brokerage and Warehousing. In addition to transportation, the company also provides sourcing services (“sourcing”). Sourcing is the business of buying, selling and marketing of fresh produce. This was the original business started by CH Robinson, the founder. It supplies fresh produce through its network of independent produce growers and suppliers. The customers include grocery retailers, restaurants, produce wholesalers and foodservice distributors. It has exclusive license agreements to distribute fresh produce under consumer-recognized brands.
In essence, CHRW separates the producer/customer from the transportation industry. It offers a seamless transportation and logistic service without actually worrying about who takes what to where. CHRW has the contract with the carrier and is responsible for prompt payment of freight charges. In case of damage, the company worries about reimbursement from the carrier. The company has contracts with its customers at a prearranged rate agreement but it buys its transportation on spot prices (and sometimes on a contract basis).
Competition and Moat: The transportation industry is highly fragmented and competitive. CHRW competes against a host of companies - logistics, trucking, property freight brokers, carriers with logistic services and freight forwarders. The company thinks that it has good competitive advantage mainly because it has a large branch network with sales people with broad knowledge about individual customers, carriers and the markets they serve.
Its size leads to more business and more contracts with freight careers. This leads to increased reach of its services, attracting more customers. A balance sheet with no debt also helps it make deals and get more customers.
The company has performed phenomenally. It has had stable margins as can be seen from the graph below.
3 Financial Strength
I looked at the data from the last 10 years and the company never had any debt. So, the company is very strong financially. Being asset light, it will be difficult for it to get loans to run their business.
4 Management
The company has a very good management. Given that its invested capital is quite small, not amazingly it has averaged nearly 30% ROIC.
The management has done quite well managing the cash. The FCF has been growing quite nicely with a CAGR of 15%! The capital expenditure is also quite low.
5 Shares
The company uses stock options as a way to share its profit to the performance of the managers. All their managers and some employees are eligible to receive equity awards. These are vested over a five-year period and have a performance-based requirement in them.
Meanwhile, the company has a buyback in place. It bought 1.45 million shares in the fourth quarter of 2012. The effect can be seen on the shares outstanding.
6 Risks
Economic recession, high carrier prices, changing fuel costs and dependence on third parties for equipment and services can have a significant effect on business.
The company derives nearly 34% of its revenue from their top 100 customers. Their largest customer comprises approximately 3% of the revenue. Loss of major clients may have significant effect on net revenues and profitability.
The business CHRW is in has a tailwind when the business is going up and the same when it is going down. Meaning, the market works to your advantage when you are successful and to your disadvantage when you are not. The larger your customer base, the larger your reach, the larger the freight transportation contracts - and this in turn leads to more customers. A similar effect can be seen in the other direction.
7 Valuation
The company has $210 million in cash and $253.6 million in short-term debt. At $59, it has an EV of $9.5 billion. With FCF of $410 million, it sells for 23 times FCF. Definitely not cheap. Probably including growth I will be happy to pay 12 times FCF as EV. Which means around $31, I might decide to buy.
Bottom line: Good management, no debt, asset light and good growth opportunities. Not cheap.
Additional Disclosure: Data taken from morningstar.com and the annual report and website of CH Robinson. The graphs have been made by the spreadsheet of Google docs.
After the death of the founder, the shares of the company were bought by Nash Brothers from his widow. In 1935, produce transportation was deregulated and soon CHRW started transporting it, mainly by railroad.
1968 Entered the regulated trucking industry
1976 Employees of CHRW buy out the Nash brothers and the company becomes 100% employee owned
1979 CHRW adopts IBM’s mainframe technology for information sharing, and electronic communication to aid its business
1984 Enters the contract career industry and after selling ROBCO Transportation Inc. in 1986, becomes a non-asset-based third-party provider
1997 Becomes publicly traded
1998 Acquires Preferred Translocation Systems, a non-asset-based third-party LTL company, and Comexter Group, a South American transportation and freight forwarding firm; also launches a customer track and trace website. Its network becomes 100 branches strong.
2003 Expands to Hong Kong and acquires third-party logistics company M. Viet GmbH based in Hamburg, Germany
2004 Acquires Dalian Decheng Shipping Agency and expands to mainland China
2006 Expands to India by acquiring Triune Freight Private Ltd.
2011 Annual sales reach $10 billion
2012 Acquires Apreo Logistics based n Warsaw, Poland, and sells its payment services business, T-Chek Systems to Electronic Funds Source LLC
2 Business
The company is a provider of transportation services and logistics solutions and operates through a network which spans North America, Europe, Asia, South America and the Middle East. The company is a non-asset-based provider. That is, they do not own any of the transportation equipment but only a few warehouses to aid the transportation of their customers' freight. The company works with approximately 53,000 transportation companies worldwide.
Being a service-based company, it uses its network and bookkeeping to offer other services like supply chain analysis, freight consolidation and program management.
The company provides following services: Truckload (customer uses the whole truck), Less than Truckload (customer provides a part of the shipment, the rest needs to be taken from other customers), Intermodal (shipment by a combination of trucks and rails), Ocean, Air, Brokerage and Warehousing. In addition to transportation, the company also provides sourcing services (“sourcing”). Sourcing is the business of buying, selling and marketing of fresh produce. This was the original business started by CH Robinson, the founder. It supplies fresh produce through its network of independent produce growers and suppliers. The customers include grocery retailers, restaurants, produce wholesalers and foodservice distributors. It has exclusive license agreements to distribute fresh produce under consumer-recognized brands.
In essence, CHRW separates the producer/customer from the transportation industry. It offers a seamless transportation and logistic service without actually worrying about who takes what to where. CHRW has the contract with the carrier and is responsible for prompt payment of freight charges. In case of damage, the company worries about reimbursement from the carrier. The company has contracts with its customers at a prearranged rate agreement but it buys its transportation on spot prices (and sometimes on a contract basis).
Competition and Moat: The transportation industry is highly fragmented and competitive. CHRW competes against a host of companies - logistics, trucking, property freight brokers, carriers with logistic services and freight forwarders. The company thinks that it has good competitive advantage mainly because it has a large branch network with sales people with broad knowledge about individual customers, carriers and the markets they serve.
Its size leads to more business and more contracts with freight careers. This leads to increased reach of its services, attracting more customers. A balance sheet with no debt also helps it make deals and get more customers.
The company has performed phenomenally. It has had stable margins as can be seen from the graph below.
3 Financial Strength
I looked at the data from the last 10 years and the company never had any debt. So, the company is very strong financially. Being asset light, it will be difficult for it to get loans to run their business.
4 Management
The company has a very good management. Given that its invested capital is quite small, not amazingly it has averaged nearly 30% ROIC.
The management has done quite well managing the cash. The FCF has been growing quite nicely with a CAGR of 15%! The capital expenditure is also quite low.
5 Shares
The company uses stock options as a way to share its profit to the performance of the managers. All their managers and some employees are eligible to receive equity awards. These are vested over a five-year period and have a performance-based requirement in them.
Meanwhile, the company has a buyback in place. It bought 1.45 million shares in the fourth quarter of 2012. The effect can be seen on the shares outstanding.
As of December 31, 2012, there were 827,443 shares remaining for repurchase under the 2009 authorization and 10,000,000 shares remaining for repurchase under the 2012 authorization. We are currently purchasing shares under the 2009 authorization. — CHRW, Annual Report 2012CHRW pays a dividend. At current prices the dividend is $1.34 which at the price of $59 a share is 2.2%. The company has been able to ratchet up the dividend at a CAGR of 22% since 2003! The payout ratio has been mostly below 40%. This shows that the growth in the dividend will continue under normal circumstances.
6 Risks
Economic recession, high carrier prices, changing fuel costs and dependence on third parties for equipment and services can have a significant effect on business.
The company derives nearly 34% of its revenue from their top 100 customers. Their largest customer comprises approximately 3% of the revenue. Loss of major clients may have significant effect on net revenues and profitability.
The business CHRW is in has a tailwind when the business is going up and the same when it is going down. Meaning, the market works to your advantage when you are successful and to your disadvantage when you are not. The larger your customer base, the larger your reach, the larger the freight transportation contracts - and this in turn leads to more customers. A similar effect can be seen in the other direction.
7 Valuation
The company has $210 million in cash and $253.6 million in short-term debt. At $59, it has an EV of $9.5 billion. With FCF of $410 million, it sells for 23 times FCF. Definitely not cheap. Probably including growth I will be happy to pay 12 times FCF as EV. Which means around $31, I might decide to buy.
Bottom line: Good management, no debt, asset light and good growth opportunities. Not cheap.
Additional Disclosure: Data taken from morningstar.com and the annual report and website of CH Robinson. The graphs have been made by the spreadsheet of Google docs.
