Two Top-Tier 3PLs Worth a Look: C.H. Robinson and Expeditors
Demand is under pressure, but long-term opportunities remain at these wide-moat logistics firms.
The broader third-party logistics industry enjoys favorable top-line growth dynamics and, over the long run, should continue to expand at a faster pace than the underlying domestic transportation market. Most of the 3PLs we cover benefit from robust economic moats supported by the network effect, and the asset-light nature of these businesses allows for low capital intensity and high returns on capital. Two top-tier 3PLs--international forwarder Expeditors International of Washington (EXPD) and domestic truck broker C.H. Robinson Worldwide (CHRW)--are trading at attractive discounts to our fair value estimates, in part because of near-term headwinds.
Third-party logistics firms are essentially travel agents for freight. They generally do not own transportation equipment, but rather buy capacity from truckers, railroads, steamship lines, or cargo airlines, then resell it to shippers for a spread. The 3PLs we cover generally boast variable-cost, non-asset (or at least asset-light) models that exhibit less cyclicality and generate higher capital returns than most traditional transportation providers. Truck brokers and international forwarders have an added buffer by way of their gross margin dynamics (net revenue over gross revenue). The cost of purchased transportation is highly variable because these firms primarily buy capacity in the spot market. As a result, in periods of macroeconomic weakness when capacity loosens and carrier pricing falls, providers can pass those declines to shippers on a lag, thereby expanding gross margins. Illustrating the resiliency of the 3PL business model, truck broker C.H. Robinson posted gross margin expansion in 2009 during the freight recession, with operating margins (off net revenue) actually rising. Furthermore, in 2009, average returns on capital across our 3PL coverage universe fell to roughly 15%, compared with 5% for the asset-based truckers. On the flip side, when freight demand strengthens or carrier rates rise because of tight capacity, gross margin compression will usually temper net revenue growth--a common theme throughout the brokerage industry this year.
Matthew Young does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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