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In the late nineteenth century, after the tracks for the transcontinental railroad were laid in North Dakota, Charles Henry Robinson moved with his family to Grand Forks, where the firm that still carries his name was incorporated.
Today, in the 21st century, US 3PL CH Robinson, an asset-light freight forwarder and truck broker, is valued at $10.7bn, including net debt.
It has grown its gross revenue to $13bn at a compound annual growth rate (CAGR) of 12.3% since 1992, broadly in line with that of net revenue and operating income over the last 10 years, and has become one of the bellwether logistics companies in the US – offering benchmark return on assets and return on equity in the industry
It’s hard to find cracks in the way the business is run. Over the past three years, its cost base has risen with gross revenues, which testifies to an efficient use of funds. Nonetheless, delving into its financials and its stock performance, the company appears to have arrived at a crossroads.
As far as its capital allocation strategy is concerned, tough decisions must be taken, not only because its stock trades at 0.8x and 19x forward sales and earnings respectively, which are rather rich forward multiples, but also because smaller players such as XPO Logistics are snapping at its heels with highly aggressive growth strategies.
A u-turn in capital allocation?
A strong and well-capitalised business, with a solid and diverse customer portfolio, CH Robinson generates about half of its net revenue from manufacturing and food and beverage verticals, and another 35% from the retail, chemicals and automotive sectors.
The manufacturing and food and beverage sectors have enjoyed mixed fortunes since the credit crunch, given that the largest producers in the world, some of which are CH Robinson’s clients, have struggled to implement effective price policies.
Macroeconomic conditions have instead dictated volume-led policies around the world and in the US – CH Robinson’s core market – and supply chain managers have seen transportation and logistics budgets squeezed, with the inevitable result that even high revenue growth rates have brought little benefits to bottom lines and shareholders.
While it’s true that CH Robinson’s revenues are still growing fast, as the group expands into being a more mature business, its earnings growth has become less appealing in recent years. Moreover, its capital allocation strategy seems to be less certain than 24 months ago, and evidence shows that it may be either on the verge of a decisive u-turn, or that a u-turn in strategy may have already occurred – at least that is what its 10-year chart for capital returns suggests.
The Freightquote deal in early December points in that direction, anyway, and comes in a year when total capital returned to shareholders via dividends and stock buybacks plunged to $400m from $1bn one year earlier. Since the Freightquote acquisition was announced, CH Robinson stock has lost 12% of its value.
So, was the Freightquote deal too little too late?
CH Robinson stock trades not too far away from its post-crisis level, and although it proved to be resilient between 2008 and 2010, shareholders are unlikely to be pleased with the way things have gone since 2011.
Between 2010 and 2014, CH Robinson returned more than a half a billion dollars a year on average to shareholders via stock buybacks and dividends – but is that sound strategy these days?
“CH Robinson announced that its board of directors declared a regular quarterly cash dividend of $0.38 per share, payable on June 30, 2015, to shareholders of record on June 5, 2015,” it said last week, noting that it had distributed regular dividends for more than 25 years. Meanwhile, buybacks will continue.
If you think this makes sense, consider that investors have turned their attention to steep growth rates rather than yield – stellar growth that is being offered by the new kid on the block, XPO Logistics, whose revenues have surged to $2.3bn in 2014 from $279m in 2012, fuelled by acquisitions. Meanwhile, relations between the two companies have never been easy.
Over the last five years, the XPO share price has climbed to $49 from $6 – an implied performance of 686%. However, high-growing and loss-making XPO is not the benchmark in the industry – CH Robinson is. Yet XPO’s market cap has risen 20% in the last three months alone, and at this pace CH Robinson’s equity valuation will be within reach in about a couple of years.
Furthermore, the equity premium at which XPO trades gives it funding options in mergers and acquisition activity, since it could use stock to finance accretive acquisitions should its banks ever decided not to lend to it to grow inorganically (and there is little sign of that happening anyway), so the pressure to act will likely intensify on its larger rival.
CH Robinson’s $365m acquisition of Freightquote in early December was a mild response to XPO’s growth strategy. Now that XPO has snapped up Norbert Dentressangle for €3.2bn, you may be entitled to wonder whether top dollar should be returned to shareholders or used to seek inorganic growth. If Charles Henry was around, there’s a chance the answer would be the latter.