March 20, 2015 CH Robinson Worldwide Inc. Current Recommendation NEUTRAL Prior Recommendation Underperform Date of Last Change 08/22/2013 Current Price (03/19/15) $75.16 Target Price $79.00 SUMMARY DATA (CHRW-NASDAQ) SUMMARY C.H. Robinson performed impressively in the fourth quarter of 2014, reporting better-than-expected earnings and revenues. Revenues benefited from the strong performance of the Transportation division. Moreover, total revenue increased 6.5% year over year. Moreover, the demand for 3PL services is growing at a rapid pace as shippers seek cost-effective one-stop solutions for their freight forwarding requirements. The company intends to gain market share by way of strategic investments made in technology and current available resources. We are impressed by the company s decision to reward shareholders through share repurchases and dividends. We are also positive on the recently completed acquisition of Freightquote.com. We believe that the stock is fairly valued at current levels with limited scope for upside. Hence we retain our Neutral recommendation on the stock. 52-Week High $77.16 52-Week Low $50.54 One-Year Return (%) 50.47 Beta 0.55 Average Daily Volume (sh) 1,411,869 Shares Outstanding (mil) 146 Market Capitalization ($mil) $10,973 Short Interest Ratio (days) 5.66 Institutional Ownership (%) 79 Insider Ownership (%) 1 Annual Cash Dividend $1.52 Dividend Yield (%) 2.02 5-Yr. Historical Growth Rates Sales (%) 11.2 Earnings Per Share (%) 5.8 Dividend (%) 8.4 using TTM EPS 24.6 using 2015 Estimate 21.8 using 2016 Estimate 19.8 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Below average Type of Stock Large-Growth Industry Trans-Services Zacks Industry Rank * 53 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 2,994 A 3,288 A 3,317 A 3,153 A 12,752 A 2014 3,143 A 3,503 A 3,467 A 3,357 A 13,470 A 2015 3,434 E 3,839 E 3,852 E 3,728 E 14,804 E 2016 15,937 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.64 A $0.70 A $0.69 A $0.62 A $2.65 A 2014 $0.63 A $0.80 A $0.85 A $0.77 A $3.05 A 2015 $0.75 E $0.90 E $0.93 E $0.86 E $3.44 E 2016 $3.80 E Projected EPS Growth - Next 5 Years % 10 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Based in Minnesota, C.H. Robinson Worldwide Inc. is a third-party logistics company. As a non-asset based transportation provider, C.H. Robinson provides freight transportation services and logistic solutions to companies across a range of industries. It selects and manages appropriate transportation for its customers freight needs through multiple transportation companies. These include motor carriers, railroads, air freight and ocean carriers. It is one of North America's largest third party logistic (3PL) companies. It operates a network of 250 offices in North America, South America, Europe and Asia. Most of its revenues come from providing truck, rail, ocean, and air transportation worldwide. Sourcing and information services are also important components of its business mix. C.H. Robinson operates in three segments: Transportation (accounted for 88.5% of 2014 revenues) provides multi-modal transportation solution including truck, intermodal, ocean, air and other value added logistics services ranging from supply chain management, freight consolidation, outsourced transportation, transportation management and information reporting. Sourcing (11.4%) deals in the business of sourcing fresh produce. The customers include large multistore grocery retailers, restaurant chains and foodservice providers. There are various national and regional branded produce programs, including both proprietary brands (The Fresh 1, Fresh n Easy, Our World Organics, Tropic Sweet, Tomorrow s, Organics, and Kensington Farms) and licensed brands (Mott s, Tropicana, Welch s, and Bambino). Payment Services (0.1%) provides core product offerings such as fund transfer, fuel payment as well as fuel card services to motor carrier companies and fuel distributors. REASONS TO BUY C.H. Robinson is considered to be among the first-in-class third-party logistics (3PL) companies given its consistent growth rate in the past few years. The company will execute its go-to-market strategies with its current resources and will expand the business through the investments made in the last couple of years. We believe that the demand of 3PL services is rapidly growing as shippers seek cost effective one-stop solutions for their freight forwarding requirements. Management intends to gain market share on the back of investments made in technology and the current resources available. We expect the growing demand for customs brokerage and transportation management services to help the company grow beyond its core offering of truck brokerage. We are impressed by the company s efforts to reward shareholders through dividends and share buy backs. During the fourth quarter of 2014, the company paid $57.4 million in cash dividends and spent $39.7 million in repurchasing shares. In Dec 2014, the board of directors of the company approved an 8.6% hike in its quarterly cash dividend, raising the figure to $0.38 per share. The raised dividend was paid for the first time on Dec 31, 2014 to shareholders on Dec 15, 2014. Furthermore, in Feb 2015, the company announced dividend ($0.38 per share) for the first quarter of 2015. It will be paid on Mar 29 to shareholders of record on Mar 6, 2015. We are positive on the January 2015 acquisition of internet-based freight brokering enterprise, Freightquote.com for $365 million in cash. The transaction was financed through the company s revolving credit facility. The completion of the deal has helped the company enhance its supply chain Equity Research CHRW Page 2
REASONS TO SELL network across Kansas City. Over the last three years, C.H. Robinson bought two logistics service providers, namely, Phoenix International and Poland-based freight forwarder Apreo Logistics S.A. The Truckload business remains highly challenged given the uncertainties surrounding its market. The current trend of road freight conversion to rail intermodal may impede the trucking business. Further, the company expects rise in expenses in the Less-than Truckload (LTL) space. The truckload market remains overruled by regulatory mandates like the Federal Motor Carrier Safety Administration's Compliance, Safety, Accountability (CSA) initiatives. Implementation of these regulations requires major investment. Hence, these regulatory expenses add to the company s cost structure, in turn affecting profitability. Going forward, we expect the rise in employee count and investment in network to weigh on margin expansion. Increase in incentive compensation along with rise in income could impact margins somewhat. We are disappointed by the weak performance of the Sourcing division in the fourth quarter of 2014. Continued below par performance of the segment will hurt the stock. The volatile and competitive nature of the carrier s ocean business is also concerning. Though positive on the company s efforts to expand via the growth by acquisition strategy, we remain concerned about the company s high debt levels. The company exited the fourth quarter of 2014 with a mere $128.9 million of cash and $500 million of long-term debt. The company is expected to raise funds by selling shares. We are not comfortable with the strategy as it involves dilution of shareholders base. RECENT NEWS C.H. Robinson Beats on Q4 earnings Feb 3, 2015 C.H. Robinson Worldwide reported fourth-quarter 2014 earnings per share of $0.77, beating the Zacks Consensus Estimate by a penny. Earnings also jumped 24.2% from the year-ago quarter. Total revenue in the quarter increased 6.5% year over year to $3,357.2 million, crossing the consensus mark of $3,336 million. Total operating expenses rose 8.5% year over year to $314.1 million in the quarter, resulting in an operating ratio (operating expenses as a percentage of net revenue) of 62.6%, as against 65.1% a year ago. Segment Details Transportation: The segment (comprising Truckload, Intermodal, Less-than-Truckload, Ocean, Air, Customs and Other logistics services) reported net revenue of $474.3 million in the fourth quarter, up 14% from the year-ago quarter. Truckload net revenue grew 15.3% year over year to $295.2 million. Meanwhile, net revenue at Lessthan-Truckload increased 7.8% year over year to $63.4 million driven by a 4% rise in total shipments and increased customer pricing. Net revenue from the Intermodal segment increased 3.8% year over year to $10.2 million. Higher operational efficiency and customer pricing contributed to the improvement.. Equity Research CHRW Page 3
Net revenue from Ocean increased 22.8% year over year to $56.9 million on improved volumes and margins. Net revenue at Air transportation division grew 7.9% year over year to $19.4 million owing to rise in volumes and net revenue margin. Meanwhile, customs net revenue climbed 16.8% to $10.8 million owing to increased rates and transaction volumes. Net revenue from Other logistics services grew 4% year over year to $18.3 million. A rise in transportation management services led to the upside. Sourcing: The segment s net revenue declined 7% year over year to $24 million due to reduced volume and net revenue from a large client. Payment Services: This segment s net revenue climbed 32.5% year over year to $3.5 million on increased cash advance option in Jul 2014. Liquidity & Debt Position C.H. Robinson ended the fourth quarter with cash and cash equivalents of $128.9 million against $162 million in the prior-year quarter. Long-term debt on the company s balance sheet at the end of fiscal 2014 was $500 million, unchanged from the end of 2013. Cash from operations increased to $513.4 million at end-2014 from $347.8 million in the comparable year-ago period. VALUATION C.H. Robinson s is currently trading at 21.8x our 2015 earnings estimate. This is at a premium to the S&P 500 but a discount to the industry average. With respect to our 2016 earnings estimate, the stock is trading at 19.8x, again a premium to the S&P 500 but a discount to the industry average. We believe that the stock is fairly valued at current levels with limited scope for upside. Hence we retain our Neutral recommendation on the stock with a target price of $79, based on 23.0x the Zacks Consensus Estimate for 2015. Equity Research CHRW Page 4
Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low CH Robinson Worldwide Inc. (CHRW) 21.8 19.8 10.0 23.8 24.6 34.4 19.4 Industry Average 27.7 26.6 12.7 15.5 47.9 N/A 27.4 S&P 500 16.7 15.6 10.7 14.5 18.3 18.4 12.0 Expeditors International of Washington Inc. (EXPD) 22.9 20.9 13.3 22.3 25.6 36.3 21.2 Panalpina World Transport Holding Ltd. (PLWTY) 25.7 20.0 N/A N/A N/A TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA CH Robinson Worldwide Inc. (CHRW) 10.4 11.1 6.0 44.3 0.5 2.1 14.1 Industry Average 3.5 3.5 3.5-5.0 1.3 1.5 15.7 S&P 500 6.2 9.8 3.2 25.4 2.0 Equity Research CHRW Page 5
Earnings Surprise and Estimate Revision History Equity Research CHRW Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CHRW. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1117 companies covered: Outperform - 16.3%, Neutral - 77.3%, Underperform 5.8%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst Maharathi Basu Last updated by Pinky Ghosh QCA Nalak Das Reason for update 4Q14 Earnings Editor Anindita Sinha Equity Research CHRW Page 7