C.H. Robinson Worldwide Still Bearish but a Buy at Year's End
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C.H. Robinson Worldwide (NASDAQ: CHRW) generates profit by moving goods, buying and selling produce, and providing information services to the trucking industry. Customers vary from family-owned stores to large Fortune 100 companies. No customer accounts for more than 7% of total revenue. C.H. Robinson will charge customers higher rates (which depend on volume and weight) than it negotiates with its network of third-party transportation companies - this is the source of its operating margin. But with the supply and demand fairly equal right now, it is hard for the company to make a good profit.
US trucking industry shipments have declined for a few months now. Because more than two-thirds of all manufactured and retail goods in the U.S.are carried by truck, the industry is considered an important economic bellwether. For this reason, a couple analysts have lowered the company’s price targets. Recently, Wunderlich Securities initiated a Hold rating and a $68 price target. The company looks solid on paper with good liquidity and a debt free balance sheet but the market is just soft right now and the Security Company envisions subpar earnings and growth at the moment.
J.P. Morgan has also lowered C.H. Robinson's price target from $72 to $70. With an expectatation of weak revenue growth (significantly weaker than expected), JP Morgan stated that the company's growth potential remains limited for the near future. Until there are signs of an economic turn, stronger net revenue and EPS will be very restricted.
This is not the only transport company struggling right now. One of its main competitors is YRC Worldwide (NASDAQ: YRCW). Its 1Q report of an EPS loss of ($12.40) was $1.98 worse than analyst’s predictions of ($10.42). The American Trucking Association recently stated that the industry is expected to haul more freight than last year, but the pace of growth would most likely be slower than in 2010 and 2011.
The freight trucking industry is finding heavy competition with rail. In fact, with road freight conversion to rail intermodal posing as a negative impact on the trucking business, C.H. Robinson will still suffer for the near future. According to market reports, North American Class I railroads registered growth of approximately 29% in their first quarter earnings. This is a surprise considering uncertainties surrounding the demand for U.S. coal and the fact that coal is a big railway mover. Yet—railroads continue to benefit from the ongoing highway conversion due to the significant rise in fuel costs of truckers. Currently, rail intermodal services are considered one of the most fuel-efficient modes of fright transportation. So for companies like C.H. Robinson Worldwide and YRC Worldwide, revenue streams will be a challenge for the near future.
It will be a couple quarters before these firms outperform asset based carriers again. Markets cycle between the two and it will be a couple quarters before the cycle swings back in favor of C.H. Robinson and other tricking brokerage companies. This is why taking a look at the company at year's end would be a good time to consider it for a long term investment.
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