C.H. Robinson Navigating Near-Term Freight Correction

C.H. Robinson’s CHRW third-quarter gross revenue fell 28% year over year, below our forecast, on greater-than-expected volume declines in the truck brokerage division, or NAST. The theme this year is that muted retail sector restocking, soft industrial end markets, and excess transportation industry capacity are driving down freight demand and customer pricing for NAST and global forwarding, especially relative to still-elevated levels a year ago.

NAST gross revenue fell 23% on lower volumes (truckload shipments fell 6%) and 16.5% lower truckload pricing to shippers (excluding fuel) driven by depressed spot rates, and now normalizing contract rates. Global forwarding gross revenue plummeted 52% as air and ocean demand has been normalizing off of historically robust levels.

Consolidated net revenue (adjusted gross profit) fell 28%. NAST net revenue deteriorated 31%, more than the segment’s gross revenue decline, due to 160 basis points of gross margin percentage (net revenue/gross revenue) deterioration. That is, pricing for shippers fell more than spot rates paid to truckers to haul TL freight due to the lag in contract pricing declines.

Adjusted net operating margin (EBIT/net revenue, excluding nonrecurring costs) deteriorated meaningfully for NAST and global forwarding, due in large part to lost leverage from plunging net revenue, partly offset by underlying productivity gains. Margins came in below our expected run rate, particularly for NAST. The adjusted margin for NAST contracted to 29% from a relatively healthy 39.3% a year ago, while global forwarding’s clean margin plummeted to 15.9%, from 34.6%. On the positive side, NAST margins only fell about 50 basis points sequentially.

We will be tempering our 2023 forecasts, but do not expect to materially alter our $91 fair value estimate. After pulling back over the past few months, the shares are trading in borderline undervalued territory relative to our long-term free cash flow forecasts.