Wed, 16 Apr 2014
A strong network effect, with scale and bargaining power, provides this wide-moat firm a long runway of opportunity to gain market share in the coming years.
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Matthew Young: Economic moats are common in transport, particularly in the asset-light, third-party logistics industry.
Within the third-party logistics space, we think highway brokerage specialist C.H. Robinson enjoys a wide economic moat. As a non-asset-based transportation provider, the company does not own trucks. You could think of it as a travel agent for freight in that it links up truckload capacity with which shippers and their customers and earns a spread in the process.
We think that the network effect bestows pretty powerful competitive advantages for the asset-light third-party logistics providers with scale. That is, customers are able to leverage companies like C.H. Robinson. They can leverage their broad capacity access and their immense bargaining power. And on the supply side, truckers gain access to a deep reservoir of freight opportunities to lower their empty miles, supplement the sales force, sales efforts, et cetera. And when you put all these things together, essentially, the dynamics become more powerful and harder to replicate really as a third-party logistics firm's network gets bigger in size.
We think evidence of these competitive advantages show up in C.H. Robinson's average returns on invested capital historically, which approached 30%. And so it's a pretty powerful dynamic in this business.
Now why do we think C.H. Robinson still has a wide economic moat? We do think competitive rivalry is intensifying in this business, which is one reason why we've given the company a negative moat-trend rating. That said, the third-party logistics industry remains highly or immensely fragmented with thousands and thousands of small and midsize providers of less sophistication than the larger providers. And we think that this provides a long runway of opportunity for the moaty firms like C.H. Robinson to gain market share in the years ahead.
In terms of valuation, we do think that C.H. Robinson is undervalued, and we think it provides opportunity for patient investors.