Wed, 19 Apr 2017
With margin compression coming, we think the market may unfairly punish the wide-moat truck brokerage leader creating an opportunity for investors.
Matthew Young: While C.H. Robinson is currently trading in fairly valued territory, we think investors should keep an eye out for potential opportunities to buy this wide-moat truck-brokerage leader at a discount to our $73 fair value estimate in the quarters ahead.
The firm has entered a period of gross margin compression, as they normalize from unusual highs in 2015 and early 2016 when truck-load industry capacity was tight, which previously drove up contractual pricing to customers. However, over roughly the past year, the tides turned, and loosening capacity weakened Robinson's customer contract pricing. So, the firm is now seeing its average sell rates to customers fall to a greater degree than prices paid to truckers--hence the gross margin pressure.
For an asset-light truck broker, its gross margin percentage reflects the health of its spread in terms of what it keeps after paying third party truckers to haul customers' freight. Historically, negative sentiment accompanies prolonged periods compression for those margins because it can be tough to discern cyclical from competitive factors. Consequently, the market often misreads C.H. Robinson's competitive positioning when those margins compress--it happened in 2012 when we last believed the stock was a bargain, and we think there is potential for that to happen again in the quarters ahead.
To some degree, competitive concerns are not completely unfounded considering C.H. Robinson has long faced ubiquitous intrusions from new entrants. In fact, we've long believed competition is intensifying, and we think that does put a lid on the firm's gross margin potential over the long run, and that is reflected in our model assumptions.
However, the network effect can mount a powerful defense in truck brokerage. Essentially, the more shippers and third-party truckers in a brokers' network, the stronger its value proposition. And that stands behind the firm's wide-moat rating. Along those lines, we don't expect the firm to become locked in a value-destructive pricing battle near term, given the highly fragmented nature of the highway brokerage landscape.