Asset-Light Truckers Look Appealing

By Ted Cooper - February 27, 2013 | Tickers: CHRW, EXPD, JBHT | 0 Comments

• Email
• Print

Of all parts of the U.S. economy, the transportation sector is about the last place investors expect to find asset-light businesses. However, there are indeed some firms in the sector that utilize an asset-light model -- and their businesses are thriving as a result.

Fewer Assets = Higher ROIC

It isn't difficult to figure out that if you have the choice between earning $500 million on $2 billion in assets or the same amount on $5 billion in assets, you would rather have the $2 billion in assets. This is because the $2 billion in assets are more efficient in turning out a profit than the $5 billion earning the same nominal profit. As a result, less capital is required to earn more money in an asset-light business.

C.H. Robinson (NASDAQ: CHRW) may not have been the first company to figure this out, but they have capitalized on the idea with great success. The company handles over 10 million shipments for more than 37,000 customers and earns close to $11 billion in revenue each year. However, the company does not actually own the vast majority of equipment that transports its clients' products. Instead, it merely aggregates its purchasing power and supply chain expertise to arrange for favorable transportation prices and services for its clients.

As a result of owning relatively few assets, C.H. Robinson has a highly variable cost structure that softens the impact on profits of freight recessions. More importantly, however, the company earns astronomical returns on assets. If you subtract cash and intangibles from total assets, the company has averaged a pre-tax return on assets in excess of 140%.

Although C.H. Robinson's return on assets is head-and-shoulders above the rest of the industry, Expeditors International's (NASDAQ: EXPD) similar model allows it to earn a high ROA as well. Its pre-tax return on assets minus cash and intangibles was 64% over the last ten years.

Expeditors International offers the same value proposition to clients as C.H. Robinson: it uses its superior buying power and experience in complex logistical operations to win over customers. In addition, the company has historically grown organically instead of relying on acquisitions for growth. Unfortunately, the management insists on keeping a large amount of cash on the company's balance sheet, so the company has a large uninvested asset dragging down potential shareholder wealth.

The advantage of an asset-light model is made clear when comparing C.H. Robinson and Expeditors International to J.B. Hunt (NASDAQ: JBHT). J.B. Hunt's model is not as capital-intensive as many other trucking companies, but it is significantly more burdened than Robinson and Expeditors.

Hunt is extremely concentrated in intermodal shipping, which uses containers that can be placed on ships, trains, and trucks. This offers the company a fair degree of flexibility and protection during an economic downturn, but it is not nearly as effective as the high variable cost structures of C.H. Robinson and Expeditors International. As a result, the company's pre-tax return on assets (minus cash and intangibles) is just 21% -- a respectable number without a doubt, but not anywhere near the other two companies' ROA.

Bottom Line

C.H. Robinson's asset-light model is superior to Hunt's capital-intensive model by a wide margin -- Robinson requires fewer assets to produce $1 in profits than Hunt requires. However, high returns on investment attracts stiff competition. Only time will tell whether Robinson's and Expeditors' established distributor bases will provide sufficient barriers to entry to create long-term shareholder wealth.

• Email
• Print
• Feedback