Echo Global Logistics Inc. (NASDAQ:ECHO) is a U.S. third-party logistics provider. The company offers truckload brokerage, as well as intermodal and international air and ocean freight forwarding services. Its core business is domestic truck brokerage, which represents more than 85% of its gross revenue. In addition, the firm also provides supply chain management services.
Since its creation in 2005, the company has aggressively expanded its operations due to favorable trends in the industry and robust sales force growth. In fact, the domestic third-party logistics industry has showcased annual growth rates averaging 10% over the last decade, better than the 3% to 4% average for rail intermodal and for-hire trucking markets. The firm is now positioned among the top 10 domestic freight brokers.
An Asset-Light Model
Echo has an asset-light business model with a robust IT infrastructure. These traits represent significant competitive advantages. For one, being a non-asset based business gives the firm flexibility to cope with margin pressure when market is in a downturn. And its IT platform represents a compelling value propositions for customers’ increasing focus on a more efficient supply chain management.
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- ECHO 15-Year Financial Data
- The intrinsic value of ECHO
- Peter Lynch Chart of ECHO
The Network Effect
Echo boasts a network of 24,000 asset-based carriers across all major transportation modes, and 22,000 customers from a wide range of industries. While its huge carrier network poses a valuable source of capacity for shippers, the firm’s growing customer base enables increasing buying power. This results in cost savings of 5% to 10% for clients, who also benefit from switching to a variable cost structure by outsourcing their logistics. Furthermore, as the business gains scale, Echo reduces fixed general and administrative costs per shipment. All in all, this will allow this relatively new firm to boost profitability, and in turn, to gain more market share from smaller and less capable providers.
Echo’s network and IT infrastructure provides the firm with solid competitive advantages. These are further empowered by a rising demand for multimodal solutions, stemming from shippers’ rising focus on supply-chain efficiency, variability in fuel costs, and better service levels from the rails.
Echo’s economic moat, however, is still narrow, since the company competes with larger and well capitalized companies with consolidated brand equity, such as CH Robinson (NASDAQ:CHRW). Rivals of a similar size, like Coyote Logistics LLC (COYLOGP) and Total Quality Logistics Inc. (TOTQUAP), also pose a challenge for the firm.
Nevertheless, data from Armstrong & Associates estimates that the top 20 U.S. freight brokers hold less than 50% of the $40 billion non-asset-based domestic transportation management market, leaving plenty of market share to be gained from smaller and less sophisticated providers.
On the Growth Path
Gradual operating margin expansion is expected as freight volume rises, allowing lower costs per shipment. And, since the company’s IT infrastructure is now more established and scalable, fewer incremental investments will be required to support growth. Thus, returns on invested capital are expected to reach the mid-teens over the next five years.
Echo’s revenue grew by 16.7% in fiscal 2013, and the company expects continuous growth to bring revenue over the $1 billion mark in 2014. Analysts estimate this will result in 41% earnings per share growth this year and another 30% in the next.
Echo’s stock trades at 28.50 times its trailing earnings compared to the industry median of 16.60. Its earnings per share, however, showcases a remarkable 23% growth compared to its rivals’ average of 8.50 and they will continue to deliver more compelling multiples. Investment guru Joel Greenblatt (Trades, Portfolio) recently increased his holdings by 54.16% backing my feeling that the stock’s recent pricing downtrend offers a good opportunity to invest in a business with solid growth potential.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.