Risk, Reward Balance C.H. Robinson

C.H. Robinson Worldwide Inc. ( CHRW - Analyst Report ) is one of the first-in-class third-party logistics (3PL) companies given its consistent growth rate over the past few years. The company’s asset light model, with diversified freight forwarding solutions, provides more earnings flexibility in an economic downturn.

We believe the demand of 3PL services is rapidly growing as shippers seek cost effective one stop solutions for their freight forwarding requirements. Given the company’s advanced technology and service capabilities, we believe it is poised to capture a significant share in the current freight transportation market.

Moreover, we expect the growing demand for customs brokerage and transportation management services to help the company grow beyond its core offering – truck brokerage – and provide a competitive advantage in the present market.

We believe C.H. Robinson’s growth opportunities include expansion of US truckload brokerage, where it possesses less than 5% of market share, penetration in the less-than-truckload and intermodal markets, expansion of Transportation Management Center (TMC) services offerings, international freight forwarding and European truck brokerage.

These broad-based growth opportunities are expected to bode well for the company’s long-term growth target of 15% in terms of gross profit (net revenue), net income and earnings per share.

However, a major impediment for the company remains intense competition in the transportation services industry. C.H. Robinson competes against logistics companies like Expeditors International of Washington Inc. ( EXPD - Analyst Report ) as well as transportation providers owning their own equipment.

The company does not own or control the transportation assets for freight deliveries. It depends on independent third parties to provide truck, rail, ocean, and air services. In the event of insufficient equipment to deliver services and increased competition, the company’s profitability could be hit hard.

In addition, the current trend of road freight conversion to rail intermodal is also likely to have a negative impact on the Trucking business. We expect a challenging air freight market to weigh on the company’s growth goals due to global economic constrains that are limiting shippers from adhering to any expensive mode of transportation within their supply chain.

Going forward, we expect a rise in capital expenditure to also weigh on margin expansion. Further, the company’s inability to enter the European 3PL market through expansion plans due to an uncertain economic outlook could also remain detrimental to its earnings.

As a result, we are currently maintaining our long-term Neutral recommendation on C.H. Robinson. For the short term, the company holds a Zacks #3 (Hold) Rank.