Following my first “Boring Is Beautiful” post which highlighted insurance broker and risk management specialist Marsh & McLennan Companies (see Boring Is Beautiful: Marsh & McLennan Companies), logistics major C.H. Robinson Worldwide Inc. (Nasdaq: CHRW) is another company which I believe deserves an investor’s attention.
CHRW is pretty much as boring as you can get. The company provides advanced logistics services (i.e. arranges for its clients to ship items in the most cost-effective and efficient way possible) to thousands of companies across the globe, and makes money from the “spread” between what it charges its customers and what it pays to the transportation companies to facilitate the shipping, since CHRW does not own a fleet of trucks, trailers, containers etc. Now lets take a look at how the company has performed recently:
While CHRW has a greater number of red cells than I would like to see, a deeper look into the company’s deteriorating credit metrics reveals the jump in debt levels was a result of an Accelerated Share Repurchase (ASR) program which the company began in August of 2013 and financed with USD$500M in debt (10 yr, 15 yr, and 20 yr issues; rates of 3.97%, 4.26%, and 4.60% respectively).
The ASR was terminated in February 2014. The average price for the stock during the period the ASR was in effect was $57.96, with a high of $62.09, and a low of $51.86 being recorded. At time of writing, CHRW is changing hands at $70.37. While I generally don’t like share buybacks, CHRW’s diluted EPS grew by an average of 7.5% annually over the past four years, which is more than double the decline in diluted shares outstanding over the same period. The company’s share buybacks certainly helped EPS growth, but they weren’t its driving force. Also, the company’s stock traded at an average of $57.96 during the period the ASR was in force, and this compares very favorably to the price of $70.38 per share at time of writing.
Overall, it would appear the debt deal to buy back shares was a shrewd move on management’s part. Furthermore, while significantly lower than before the ASR, the company’s coverage ratios are still strong and interest amounts remain quite small on a nominal basis.
OIL (CL1: Generic 1st ‘CL” Future)
I also took a look at the price of oil during the review period to get a better understanding of its impact on CHRW since the company does not physically own a transportation fleet but has contracts with fleet providers and as such earns its money from the “spread” between what it charges its customers and what it pays suppliers of transportation:
High: $113.93 on April 29, 2011
Low: $34.73 on December 18, 2015
Oil has been pretty volatile over the past five years but the company was able to post a slight growth in its transportation margin and maintain its sourcing margin. This must be commended.
Organic growth versus M&A
A review of prior year annual reports show a combination of both organic growth and growth by acquisition feeding the top line. CHRW is likely going to continue to be a consolidator in this industry going forward, especially likely as it seeks to expand non-U.S. revenues (the company recently announced that it is acquiring Australia-based APC Logistics, a leading freight forwarding and customs brokerage firm).
CHRW is a leader in an attractive and growing market with what I believe to be quite significant barriers to entry (mainly employee know-how, I.T., and contract relationships). Logistics is key to any successful business; if you can’t get your product to your customer on time and in pristine condition, your business will not survive no matter how “good” or “effective” the product actually is.
CHRW has been in business since 1905 and has managed to grow its contractual relationships to include 68,000 purveyors of transportation solutions (LTS, truckload, ocean etc.).
CHRW is not cheap: its trading for a little over 19 times trailing earnings, offers a current dividend yield of about 2.45%, and is up about 13% YTD. However, I believe the company makes an excellent long-term hold for the investor looking for a well-run business in an attractive industry with potential for both share price appreciation and dividend growth. Given the run up however, I would dip my toes in first and then buy on dips.
What do you think of C.H. Robinson Worldwide?