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Re-Allocating the Business Model: The Logistics Industry
Posted by: Vanina Egea (IP Logged)
Date: October 11, 2013 09:19AM

I think the logistics industry offers today promising growth as the world economy continues to improve. As trade evolves and slowly returns to pre-crisis levels, the demand for shipping services increases. And today, the most important standard for evaluating a logistics firm is the delivery speed. Let us look at two well-developed international shipping firms like Expeditors International (EXPD) and CH Robinson (CHRW).

Going east

Expeditors is a global provider of logistics related services based in Seattle, Wash. The firm offers an international network for movement and positioning of goods. Internally, the company is structured around an incentive-based compensation scheme, allowing for its many branches
to be rewarded for individual achievements.

At this moment, Expeditors is dealing with a slower performance in the ocean segment and rising freight prices. Ahead, the company´s growth will be pushed by economic synergies in the Asian-NA route, improved customer service, aggressive service promotion, and advance cost control policies. Last, competition arises from local and regional brokers, not global because the industry is well established. An industry in which the firm holds a dominant position thanks to a wide economic moat.

In the long term, Expeditors will outperform competitors due to a superior business model and expansive supply chain. The strategy is focused on organic growth and strategic acquisitions. The model’s primary segment is airfreight and is one of the largest companies operating in the USA-China route. The firm is also looking to expand operations in the customs-brokerage segment in order to improve margins. Last, the firm is investigating additional growth avenues on the oil & gas, aerospace and defense, as well as expanding activities in the construction area.

Financially, Expeditors is very strong, although margins are not the widest. Trading at 25.4 times its earnings, the stock packs a 37% discount to the industry average. In the last quarter, most transaction has seen of gurus reducing positions or selling out. However, I prefer to follow Steven Cohen’s optimism, which increased his position by over 600%. The market dominant position, global reach, and operation of the NA-Asia route, set the company in a privileged position to absorb market synergies.

Growing threats

Headquartered in Minnesota, CH Robinson is a third-party global provider of multi-modal transportation services and logistics solutions. The firm’s network consists of 276 terminals in Europe, Asia, Australia, North and South America. Also, announcements have been made public about a new facility in Turkey.

CH Robinson is expected to face competitive freight market, declining truckload market share and limited margin expansion opportunities due to rising transportation costs pose as near-term headwinds. Also, dependence on third party truck providers may limit available transportation assets. Hence, margin improvement opportunities are not readily available making short-term growth intangible. Last, management has already made comments concerning the company’s insufficient truckload market share.

The road ahead for CH is troubled to say the least. Declining net revenues, high uncertainty over the truck market and rising debt due to acquisitions are some of the most urgent challenges. Additionally, new government regulation requires important investments, implying further stress upon finances. On the upside, management is already exploring for new paths to profitable opportunities. Evidence is found in the new division called ChemSolutions, dedicated to chemical manufacturing and distribution customers.

The financial record for CH is moderate due to debt concerns, and thin margins. Currently trading at 15.8 times its earnings, the stock packs a 61% discount to the industry average. My pessimism is challenged by Donald Yacktman, the largest guru holding a position, and Manning & Napier Advisors’ recent purchase, positioning behind Yacktman. I would like to see the company set the truckload part of the business on a stronger path before recommending it.

Not sinking

I prefer Expeditor because it constructed a wide economic moat. Additionally, Expeditor holds a dominant market position and will benefit greatly from the Chin-USA route. Meanwhile, CH Robinson’s model has been hard-hit by the crisis and is still looking for ways to recover the business model.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

Guru Discussed: Donald Yacktman: Current Portfolio, Stock Picks
Stocks Discussed: EXPD, CHRW,
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