C.H. Robinson (CHRW)

[Guest JoelS]

- Third party logistics company.

- Solid moat http://punchcardblog.wordpress.com/2014/10/31/c-h-robinson-and-two-sided-markets/

- Alan Mecham holding

- Priced to perfection at 21x forward earnings or a misunderstood compounder?

 

 

 

[Liberty]

That's one that I looked at maybe 6 months ago and ended up passing on. I'm thinking of having another look, but if I remember correctly, they had wonderful ROIC and a very interesting asset-light business model, but at the time I didn't understand very well why their FCF/share was declining and debt going up (maybe it's just cyclical as this blog post says, but I don't understand the industry dynamics well enough to be sure).

 

Definitely an interesting business, though.

[Guest Schwab711]

I love this company and the industry. I'm still learning it so I don't have much to add at the moment but the fact that CHRW is cheap enough to bring punchcardblog out of retirement is worth noting (not sure if this is true at all but it is one of my top 3 blogs for quality of work and ideas).

 

In all seriousness, I have a copy of the 2013 (for 2003-2012 data) S&P 500 manual (think old Moody's Manuals) and CHRW is easily one of the best companies since 2003 for all of the return metrics. This is one company that I'm fairly confident will be operating in the same manner 10-20 years from now (logistics brokering). The question is what is a fair price for an excellent company and thus, what is our margin of safety. I don't mind buying above 10x operating income if there is good reason to believe ROIC will be maintained for a significant period of time.

[frommi]

Can someone explain the moat in a short sentence? I think it was a conference call where they mentioned that they are competing with smartphone apps, that was a red flag for me and i exited the position. ( I cloned mecham without understanding the investment, very bad mistake. And of course the stock run up after that. :) )

 

[mcliu]

Can someone explain the moat in a short sentence? I think it was a conference call where they mentioned that they are competing with smartphone apps, that was a red flag for me and i exited the position. ( I cloned mecham without understanding the investment, very bad mistake. And of course the stock run up after that. :) )

 

The company has strong network effects by connecting shippers to carriers.

[frommi]

The company has strong network effects by connecting shippers to carriers.

 

And why has no other company in this industry the same moat?  ;D

[cubsfan]

The company has strong network effects by connecting shippers to carriers.

 

And why has no other company in this industry the same moat?  ;D

 

The carriers are very fragmented - lots of small trucking companies and independents. So the carriers get plugged

into the network to get the calls from CHRW. So it's the "network effect", like an E-bay or MasterCard.

[KCLarkin]

The company has strong network effects by connecting shippers to carriers.

 

And why has no other company in this industry the same moat?  ;D

 

You should spend some time researching "network effects". In this case, CHRW has the most shippers and the most carriers. So it has the biggest moat. In many industries, network effects tip the entire market to one winner. In the 3PL industry, the network effects are somewhat muted by the fragmentation of the industry. So a winner-takes-all scenario is unlikely.

[frommi]

When someone writes a smartphone app that does the same but costs nothing because it is sponsored by advertising, how is CHRW able to compete against that in the long run? Think about how Uber disrupted the taxi industry in a very short period of time. Thats the point i don`t understand. Why is that not possible in this business?

[cubsfan]

The company has strong network effects by connecting shippers to carriers.

 

And why has no other company in this industry the same moat?  ;D

 

Here is the Morningstar view of the CHRW moat. This, along with the "asset-lite" business model

is likely why the stock never looks cheap on valuation metrics.

 

C.H. Robinson maintains a wide economic moat thanks to the network effect. Its industry-leading network of shippers and carriers reinforces its compelling value proposition and duplication by small providers with fewer resources would be a formidable task.

 

In its core transportation businesses (92% of net revenue), C.H. Robinson's substantial customer base of more than 40,000 shippers affords significant buying power. As a result, the company can procure capacity at lower rates than shippers could generally obtain directly with carriers, thereby providing customers with opportunities for material cost savings. Shippers also enjoy the added benefit of converting fixed transportation costs (such as a large traffic management department) into variable costs when outsourcing logistics management functions.

 

Furthermore, C.H. Robinson's vast network of 56,000 asset-based carriers across most transportation modes acts as a valuable source of capacity for shippers. We believe this attribute is becoming more appreciated by customers given the strong potential for intermittent truckload capacity shortages in the years ahead. Tight capacity conditions are linked to the driver shortage and rising regulation, including the government's CSA program and recently revised hours-of-service rules. These factors are keeping most truckers from materially increasing fleet size despite decent freight demand. Additionally, C.H. Robinson's relationships with air, ocean, and rail carriers support multimodal capabilities that optimize shippers' use of truckload, less-than-truckload, and rail intermodal on the domestic front and air and ocean freight for overseas shipping. We believe demand for multimodal solutions is rising, driven in part by improving service levels from the rails and shippers' focus on supply-chain efficiency. This dynamic should play well into the hands of 3PL providers such as Robinson because asset-based truckers must focus on maximizing tractor utilization.

 

From the perspective of carriers (including truckload and LTL), C.H. Robinson is a highly attractive source of freight opportunities, given its ability to aggregate fragmented demand across a broad customer base of shippers. In this way, truckers can minimize empty miles and supplement sales efforts.

 

While competitors with sufficient capital can replicate technology, C.H. Robinson's robust proprietary IT platforms provide differentiation from smaller providers with fewer resources. We expect the company to garner additional market share from less capable 3PL competitors as supply chains continue to increase in complexity, requiring sophisticated informational expertise and broad, vetted capacity relationships. C.H. Robinson's strong technology infrastructure, coupled with a vast reservoir of market data, also enhances internal pricing decisions and improves customer connectivity and reporting. Moreover, its systems can raise switching costs, particularly in cases where it integrates with customers' IT systems.

 

[KCLarkin]

When someone writes a smartphone app that does the same but costs nothing because it is sponsored by advertising, how is CHRW able to compete against that in the long run? Think about how Uber disrupted the taxi industry in a very short period of time. Thats the point i don`t understand. Why is that not possible in this business?

 

The smartphone app would need to overcome the network effects. In a fragmented industry, this is not easy without a salesforce. Unless the app has substantial VC funding, the economics wouldn't work. CHRW also provides working capital and other benefits beyond simple match-making.

 

Do you know the names of any competing smartphone apps or are you just speculating on potential disruption? I guess there is potential to pick off some of the simple, low-margin business but logistics gets complex pretty quickly.

 

The taxi industry is more prone to disruption because competition is artificially limited by licensing. 3PL is already very competitive.

[frommi]

When someone writes a smartphone app that does the same but costs nothing because it is sponsored by advertising, how is CHRW able to compete against that in the long run? Think about how Uber disrupted the taxi industry in a very short period of time. Thats the point i don`t understand. Why is that not possible in this business?

 

The smartphone app would need to overcome the network effects. In a fragmented industry, this is not easy without a salesforce. Unless the app has substantial VC funding, the economics wouldn't work. CHRW also provides working capital and other benefits beyond simple match-making.

 

Do you know the names of any competing smartphone apps or are you just speculating on potential disruption? I guess there is potential to pick off some of the simple, low-margin business but logistics gets complex pretty quickly.

 

The taxi industry is more prone to disruption because competition is artificially limited by licensing. 3PL is already very competitive.

 

Thanks that was helpful. I just reread the conference call from february to find what i had in my mind about the mobile competition, but the only thing i found was

 

And as we commented down below, while all of our transportation services and the 3PL market is more competitive than it was several years ago in the LTL arena, it does feel as though it’s maybe even more competitive simply because of the fact that the capacity side is a more constant in the marketplace. In terms of access to it and things like technology are more important around the automation of the process. So it allows for more aggressive market share goals by us and competition to go after greater volumes of freight.

 

So perhaps i had this smartphone idea in my head while reading and overreacted.

[Guest Schwab711]

When someone writes a smartphone app that does the same but costs nothing because it is sponsored by advertising, how is CHRW able to compete against that in the long run? Think about how Uber disrupted the taxi industry in a very short period of time. Thats the point i don`t understand. Why is that not possible in this business?

 

The smartphone app would need to overcome the network effects. In a fragmented industry, this is not easy without a salesforce. Unless the app has substantial VC funding, the economics wouldn't work. CHRW also provides working capital and other benefits beyond simple match-making.

 

Do you know the names of any competing smartphone apps or are you just speculating on potential disruption? I guess there is potential to pick off some of the simple, low-margin business but logistics gets complex pretty quickly.

 

The taxi industry is more prone to disruption because competition is artificially limited by licensing. 3PL is already very competitive.

 

Thanks that was helpful. I just reread the conference call from february to find what i had in my mind about the mobile competition, but the only thing i found was

 

And as we commented down below, while all of our transportation services and the 3PL market is more competitive than it was several years ago in the LTL arena, it does feel as though it’s maybe even more competitive simply because of the fact that the capacity side is a more constant in the marketplace. In terms of access to it and things like technology are more important around the automation of the process. So it allows for more aggressive market share goals by us and competition to go after greater volumes of freight.

 

So perhaps i had this smartphone idea in my head while reading and overreacted.

 

I would rather you stubbornly question than blindly trust others. This will give everyone more confidence.

 

This is the eBay of contract logistics with a much longer runway (they speculate that only 15% of shipping is done through a broker and CHRW has something like 30% market share and 2nd place isn't even close).