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Stock Strategist

C.H. Robinson Can Still Deliver the Goods

Despite gross margin pressure, this top-tier highway broker's prospects remain attractive.


 C.H. Robinson Worldwide (CHRW) has seen persistent gross margin compression for more than a year, weighing on its net revenue growth. However, we expect margins to stabilize in the years ahead, and we think this wide-moat truck brokerage specialist remains well positioned for gradual third-party logistics industry consolidation. We expect the firm to benefit from market share gains and rising demand for top-tier providers with access to flexible capacity and sophisticated IT infrastructure. Overall, the stock still trades at a discount to our fair value estimate, in part because of the near-term gross margin headwinds.

Net revenue (gross profit) margin pressure as well as soft employee productivity trends (due in part to new hires and the Phoenix acquisition) have weighed on C.H. Robinson's results, but our fair value estimate of $69 per share reflects the likelihood that sluggish freight demand, including soft transactional activity, tempers volume and pricing growth in the year ahead. We note that net revenue reflects gross revenue less purchased transportation, while gross margins are net revenue over gross revenue. We model average annual net revenue growth in the high single digits through 2017, reflecting a combination of low-single-digit underlying domestic freight demand, incremental third-party logistics outsourcing, and solid market share gains from both asset-based trucking companies and small freight brokers. We project consolidated operating margin off net revenue to approach 41% over our forecast period. This compares with our adjusted 39.5% forecast for 2013 and an adjusted 41.9% in 2012 when excluding nonrecurring items associated with the T-Chek divestiture and Phoenix acquisition. Our long-run operating margin forecast is below the firm's five-year historical run rate of 42%, primarily reflecting Phoenix's lower-margin global forwarding operations, but also the likelihood that Robinson increases salesforce investment as it targets market share.

Matthew Young does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.