EUR 850.00 For Business Accounts Only

Morningstar | Impressive Pricing Execution Continues to Drive Healthy Overall Growth in C.H. Robinson's 3Q

Wide-moat logistics specialist C.H. Robinson once again posted strong third-quarter gross revenue growth near 13.5%, slightly above our expectations on very healthy truck-brokerage pricing in the flagship North American Surface Transportation division. NAST gross profit margins (net revenue/gross revenue) were largely in line with our anticipated run rate. Gross margins increased year over year and sequentially as gains in sell-rates (to shippers) on truckload business pulled further ahead of increases in capacity costs, thanks in part to highly successful contract repricing trends this year. Consolidated net operating margin was quite healthy, benefiting from solid overall net-revenue growth, and didn’t deviate drastically from our forecast.

Since our midcycle revenue and profitability assumptions remain mostly intact, we don’t expect to materially alter our $83 fair value estimate. The shares reacted favorably to third-quarter results, rising nearly 4% following the morning conference call on Oct. 31, and are now back in borderline overvalued territory (11% premium to our fair value). While truckload-market capacity is showing some signs of adjusting to ELD-related disruption, it remains tight from a historical perspective. Thus, we continue to believe the operating backdrop, especially in terms of pricing, will remain favorable for C.H. Robinson (and peers Echo Global Logistics and Landstar) for the remainder of 2018 and into the first half of 2019, though growth comparisons will become more difficult. That said, in our view the stock price is on the border of effectively baking in slightly over-optimistic long-term growth assumptions.

Third-quarter net revenue (gross revenue less transportation costs) in the core NAST division, which includes the flagship highway brokerage unit, increased 23% year over year (an impressive 19% year to date), driven by increased sell-rates to shippers rooted in unusually tight trucking-market capacity in recent quarters. NAST net-revenue expansion came in slightly ahead of segment gross-revenue growth (which was up 19%) as gross profit margins rose 60 basis points to 15.9%. Gross margins would’ve been even higher if not for the negative mathematical impact of rising fuel surcharge pass-through revenue. The favorable pricing backdrop, including marked success repricing contractual business over the past three quarters has enabled C.H. Robinson to more easily pass along higher rates paid for truck capacity. During the quarter, buy rates for capacity increased 12%, while sell rates to customers increased more (up 14%); those growth rates were roughly even during the first half of the year. We expect this positive trend to persist for the remainder of 2018 and into early 2019 thanks to the benefit of strong contract repricing throughout 2018, coupled with moderating buy rates for capacity (spot pricing appears to be backing off historical highs seen in the first and second quarter).

Less-than-truckload shipment volume was up 4.5%, but core truckload volume contracted 0.5% because of lost freight awards linked to contract repricing efforts in recent quarters. This isn’t necessarily a bad thing because pricing gains have been quite robust, driving strong net revenue growth. C.H. Robinson has a long history of successfully balancing market share gains and pricing in highly competitive markets (and throughout the freight cycle). Of note, volume trends improved materially from 6% year-over-year declines (on average) posted in the first half.

C.H. Robinson’s consolidated operating margin (calculated off net revenue) swung positive on a year over year basis in the second quarter, and that trend persisted in the third quarter--margins increased an impressive 270 basis points to 35.4%. NAST operating margin increased 370 basis points to 43.9%, despite continued increases in variable incentive compensation, on the back of leverage from net revenue growth and productivity gains (segment headcount was roughly steady). Global air and ocean forwarding segment margins declined due to increased headcount, higher variable compensation, and incremental amortization related to the third quarter 2017 Milgram acquisition. That said, we have high confidence the firm will post forwarding-segment margin gains in the year ahead as it realizes synergies from recent acquisitions and capitalizes on heavy IT-related investments aimed at process automation. Robinson Fresh division (produce sourcing activities and related transportation) margins increased thanks to robust truck-transportation pricing gains, which more than offset lower sourcing profits. Overall, C.H. Robinson continues to comfortably rank among the most profitable providers in the third-party logistics industry.