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CH Robinson Rattles The Supply Chain

Posted: Jul 04, 2008 10:30 AM by Gregory S. Davis

Tickers in this Article: CHRW, FDX, UPS

CH Robinson Worldwide (Nasdaq:CHRW) has consistently grown earnings over the past four quarters, which can't help but grab your attention. Even the behemoth Wal-Mart cannot make that claim.

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The company serves as a third-party logistics supplier to Fortune 500 companies and local mom-and-pop owners who need merchandise moved through the supply chain. Even with rising energy costs, CH Robinson has found a way to generate profits.

No Trucks, No Planes, No Problem
CH Robinson is unique because it does not actually own the equipment used to transport its customers goods. Instead, it has the flexibility to choose from more than 48,000 carriers to transport goods. By not owning the transportation assets Robinson can limit its cost by only paying for the shipping capacity it needs. (To learn more, check out Getting To Know Business Models.)

Supply chain management is often overlooked. Most consumers simply go to the mall for clothing or to the grocery store for produce without considering how the items were transported or where materials that were used are sourced by the manufacturer. As companies continue to focus on emerging markets, it becomes extremely critical to coordinate the "who" (as in, who is our raw materials provider?) with the "where" (as in, where will the manufacturing take place?) and "how" (as in, how long will it take to be delivered, and how much will it cost?)

Valuation
CH Robinson's operating income increased 22% in 2007 to $509 million on $7.3 billion in revenue. The bulk of its revenue was generated by its multimodal (truck, air, ocean, and rail) transportation business. By increasing volumes shipped and by adding new customers, Robinson was able to cope with rising fuel prices and softening demand for trucking services.

Among the better known global transportation players like FedEx (NYSE:FDX), and UPS (NYSE:UPS), CH Robinson has the smallest operating margin at 6.91%. The operating margin is the percentage of revenues made up by operating income. FedEx and UPS reported operating margins of 7.79% and 13.54% respectively last year. For the first quarter of 2008, Robinson's operating income increased 18% over the same period a year ago on revenues of $1.9 billion. (Find out how to put this valuable measurement to use in Analyzing Operating Margins.)

Global Expansion Needed
Robinson's greatest opportunity to boost its operating margins lies outside of the

U.S

. The company estimates that trillions of dollars are spent globally on transportation and logistics, yet it only generated 8% of its revenues outside of the U.S. last year. The best strategy to enter a foreign market may be to buy a local company in order to cut down on red tape and the learning curve inherent when establishing a new venture overseas.

Conclusion
CH Robinson is a third-party logistics provider with strong fundamentals that has remained resilient during tough economic times. The company has proved it can handle slowdowns in the U.S., so investors should focus on its ability to expand across the water to challenge its larger competitors.

By Gregory S. Davis

Gregory S. Davis is an investment writer and consultant for his company G.Davis Capital Inc. His core methodology for choosing investments include patience, diversification and asset due diligence. Gregory is a graduate of the Wharton School of Business. He is also a board member of StoriesWork, a non-profit organization based in Durham, NC that uses storytelling to empower youth and individuals to utilize alternative dispute resolution tactics.

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