Matthew Young: In 2018, the unprecedented truckload-industry capacity crunch drove significant spot-freight opportunities to the asset-light truck brokers, bolstering both their pricing power and gross margins. The large providers we cover, including C.H. Robinson and Landstar, posted impressive 20%-plus gross and net revenue expansion in 2018. Truck brokers tend to do very well during periods of disruption because of their broad capacity relationships with small carriers. Recall, brokers don't own equipment but rather buy capacity from asset-based truckers in the spot market and resell it to shippers for a spread.
However, 2019 ushered in an entirely different narrative, as the operating backdrop has gone from boom to bust. In short, the capacity crunch dissipated, and the truckload supply and demand balance has become quite loose for several reasons, including a pullback in freight demand.
As we head into 2020, highway brokers are now grappling with abundant trunkload market capacity and plummeting spot pricing to customers, and contract rates are now following suit. When all is said and done for 2019, we expect the large incumbents to report 10%-plus gross revenue declines, though net revenue will fall slightly less thanks to gross margin expansion.
We do expect 2020 to prove slightly better, but the backdrop probably won't yield a major turnaround for brokers’ operating performance. Several large incumbents like C.H. Robinson will probably see truckload volume flip positive on efforts to ramp market share. But we suspect that to be offset by the carryover impact of falling contract rates. Thus, brokers’ gross revenue will likely prove flattish in 2020 and net revenue will likely decline as gross margins normalize.
However, assuming no recession arises, we expect growth to return in 2021, and on a midcycle basis we continue to believe C.H. Robinson, Landstar, and Echo Global Logistics ECHO are capable of 6%-plus net revenue growth, with slightly higher EPS growth. These are moatworthy providers that are well-equipped to adapt to the shifting logistics landscape, including the proliferation of digital truck brokers.
On the valuation front, logistics stocks have eased since mid-2018, when we considered most to be overvalued. Landstar still looks a bit rich, but C.H. Robinson and Echo are inching closer to a buying opportunity. We think investors should stay tuned because market sentiment usually overreacts on competitive concerns during periods of sluggish net revenue growth, creating attractive entry points for these high-quality logistics stocks.