Comment / Analysis: the ‘Black Horses’ that may find riding out a sluggish freight market difficult

first_img By Alessandro Pasetti 06/01/2016 A few technical analysts predict more pain ahead for transport, but here at The Loadstar we abide by fundamentals, so it’s quite easy for us to argue that not all the companies we monitor daily are in the same boat.Our team has selected four black horses that could find it difficult to ride out of this sluggish freight market, but certainly can deliver plenty of shareholder value in 2016, for different reasons.The four are CH Robinson, Kerry Logistics, Echo and Expeditors.Best of breed © Georges Kyrillos | Dreamstime.com center_img Just like many of its rivals, US 3PL CH Robinson didn’t have a great run in 2015, and shareholders suffered in spite of heavier stock buybacks, which rose 25% to $159m in the nine months ended 30 September. Share repurchases make sense at times and came on the back of rising operating cash flow, which was boosted by working capital and higher net profits, but they did little to lift confidence among investors.Its shares lost 16% of value in 2015, and challenging trading conditions now mean that the CH Robinson must seriously fight smaller competitors – such as loss-making XPO Logistics – that are pulling all the stops to grow and gain market share in a flash. The stock of XPO Logistics has almost halved in value in recent months, and CH Robinson should make sure that the pressure builds up on its rival.When reporting quarterly results in late 2015, CEO John Wiehoff said the firm was able “to continue to take market share in the third quarter while maintaining discipline and focus on our customer service and efficiency initiatives.”That was good news. Demand is soft in the US, and organic growth could have become more difficult to achieve – both elements indicate that an acquisition could be just around the corner, but only if the opportunity is right. Operationally, its strategy is paying dividends, and that shows in the performance of its growing core truckload business, which was responsible for almost $1bn of revenue in the in the nine months ended 30 September (almost 60% of group revenue, up 9.6% year on year).CH Robinson has been overly cautious with regard to its capital allocation strategy; it drew some criticism from our team in early 2015, but it has all it takes to bounce back, and its latest quarterly results show that revenue is under pressure but earnings are holding up relatively well. On top of that, the board is managing expectations; it could be more aggressive with regard to capital deployment, “but benchmark returns already set the standard in the industry”, one of its banking advisors reminded me today.“In this market, its corporate strategy makes a lot sense, when you consider what investors want,” he added.Well, its quarterly dividend recently rose, and CH Robinson is now offering investors a forward yield in the region of 2.5%, which is above average and indicates that its shares could have room to appreciate further from its current levels. It’s a yield play rather than a growth story, and these elements – combined with a lowly beta of 0.4 – are pivotal when it comes to attracting investors, particularly if volatility in the stock market springs back.The Asia specialist An integrated logistics and freight forwarding businesses, Hong Kong-based Kerry Logistics is a rather different story, and one that needs growth as well as a higher free float, in my view, in order to reward shareholders. Its shares currently trade on paltry multiples based on projected earnings, cash flows and book values, but it couldn’t be otherwise given its focus on Asia and China.The business is properly financed, however, and its relative valuation also reflects end markets that aren’t exactly in great shape. Less than a year ago, Kerry made a move into regional express deliveries, securing a number of Chinese courier licences. The market is highly fragmented, and weak freight volumes are an obvious risk, but analysts are unfazed: over the medium term, they expect it to add about HK$1bn (US$130m) of revenue annually, a performance that would be consistent with its track record.Challenging market conditions notwithstanding, Kerry is not wasting time and is shoring up its management teams around the globe. Furthermore, it this week opened a new IT development centre in Penang “to harness internet technology in support of its rapidly growing international operations”. We’ll keep an eye on how things develop there.Finally, its forward yield is about half that of CH Robinson, but the market expects it to deliver higher growth rates, and that is what Kerry needs to attract new investors and volumes, hence liquidity, to its shares.OutliersExpeditors and Chicago-based Echo Logistics have enjoyed differing fortunes in recent times. The shares of the former, backed by strong fundamentals and record profits, were in positive territory in 2015, while those of the latter fell over 30% last year, with most of the losses in the second half.Not only has volatility had a big impact on the value of many freight forwarders since last fall, but investors also decided to ditch the shares of transport companies that had pursued very aggressive, acquisition-led strategies in order to gain market share. As such, Echo shareholders suffered.Given its size (market cap $650m), however, and its valuation (based on core cash flows), Echo stands out as one of the most appealing takeover targets in the industry. I think management has made a great effort so far, and is investing to grow the business while paying attention to returns and value. Its latest quarterly results were particularly good and pleased investors.If Echo continues to deliver – I have reason to believe it will – and its relative valuation based on cash flows doesn’t rise accordingly, then it would be a great time to have your name on the shareholder register.“I wouldn’t be surprised to see an opportunistic offer of at least $1bn for the enterprise” one senior rainmaker in London told me on Monday.Of course, Expeditors is a very different play in the logistics industry, and not only because it dwarfs Echo. Its different appeal shows in its recent stock performance as well as in its track record, which is truly impressive, although 2015 was a year of tumultuous executive changes, as we previously argued.Expeditors is one of the first companies I covered for The Loadstar back in November 2014. Since then, the all-in return associated to its shares has been barely acceptable, which is not exactly what shareholders should aim for after years of little joy, but the downward pressure in the second half of 2015 was felt all across the industry, and, in fairness, Expeditors is still changing a lot in terms of management.Its shares are stuck around the levels recorded in mid-2011, and “it takes a huge leap of faith to be upbeat about its prospects, given its recent performance on the market”, a cash trader told me yesterday.I do not share the feeling: Expeditors is set to record one of its best years on record, and were it not for volatile trading conditions – which, incidentally, are here to stay – it would have likely delivered stronger returns in the second half.That, at least, is our take, and is based on its solid fundamentals.last_img read more

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