C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) recently received the attention of 12 different analysts, who increased their expectations for the next quarter. CHRW did also deliver better than expected quarterly EPS, which I believe could explain recent increases in the stock price. In my view, with different software used with artificial intelligence technologies to solve supply chain issues, CHRW could enhance its FCF margin growth in the coming years. Besides, even if certain shareholders may not welcome the recent restructuring efforts, I believe that they could be beneficial for further net income growth. There are some risks with regard to new tariffs, tax changes, or failed acquisitions, but I think that CHRW could trade at better price marks.
C.H. Robinson
Robinson appears to be one of the largest logistics companies globally. Services offered include the automation of transfers and technological innovation in this type of service for its clients, located in South America, Europe, Asia, North America, and Oceania.
A large part of its operations is supported by companies that provide transportation services, which last year numbered more than 95 thousands to fulfill all deliveries. These logistics services come with services related to distribution assembly for companies, services for special loads, advice, and activity reporting among others.
In addition, Robinson participates in the distribution and supply market for food products such as fruits and vegetables. With 100 years of experience in the logistics business, the company has a distribution and transportation network, and serves clients mainly in the gastronomic field or retailers of these products, to whom the company also offers the service of the strategy for logistics, replenishment, and reporting on the status of the products in each of the stores.
Operations are divided into two segments: transportation in North America and global operations. The first of these segments is mainly composed of cargo transportation and logistics services in the United States, Mexico, and Canada, while the international operations segment covers distribution and logistics operations through offices in the aforementioned continents. Additionally, Robinson operates its fruit and vegetable distribution business through the Robinson Fresh name.
In relation to its clients, during 2023, Robinson served more than 100 thousand active clients globally, including companies that are part of the Fortune 500 catalog and small companies with national or regional businesses.
With that about the business model, I believe that it is time to review the company given the fact that the company published its results for the first quarter. We are talking about better than expected EPS and quarterly revenue, as well as an impressive increase in EPS revisions reported in the last 90 days. 12 different analysts increased their expectations for the next quarter. In my view, further optimism with regard to the company could accelerate the demand for the stock.
Balance Sheet
As of March 31, 2024, the company reported $121 million in cash, with close to $2.59 billion in accounts receivable and total current assets worth $3.1 billion. It seems that the company gets paid a bit late from clients, so it uses some debt to finance its operations. The current ratio is larger than 1x, so I am not really concerned about the total amount of liquidity. Goodwill stands at close to $1.4 billion, and the total amount of assets is close to $5.4 billion, which implies an asset/liability ratio close to 2x. In sum, the balance sheet appears solid. The company has a solid financial position that allows management to buy other targets.
With regard to the list of liabilities, the company reported accounts payable of $1.3 billion and total current liabilities of $2.2 billion. Current debt is close to $280 million, and long-term debt stands at $1.42 billion. The company does pay a bit late to providers; however, the company uses some debt to finance its working capital and other needs.
I reviewed the company’s financing arrangements because the total amount of debt does not seem small. Revolving credit facilities, senior notes, receivable securitization facilities, and other agreements include interest rate close to 4.2% and 6.45%. With this in mind, I believe that the cost of capital will most likely be larger than 6.45%.
Some of the debt agreements include covenants that restrict the total amount of leverage that the company could report. There is a maximum leverage ratio of 3.50 to 1.00, so I think that shareholders may not worry about the leverage ratio going higher than 3.5x.
The Note Purchase Agreement contains various restrictions and covenants that require us to maintain certain financial ratios, including a maximum leverage ratio of 3.50 to 1.00, a minimum interest coverage ratio of 2.00 to 1.00, and a maximum consolidated priority debt to consolidated total asset ratio of 10 percent. Source: 10-Q
FCF Driver 1: 2024 Restructuring Program Could Bring Further FCF Margin Growth
In the last quarterly report, the company noted a new 2024 restructuring program, which is expected to bring cost reduction initiatives. Among the new changes, there are optimizations of management hierarchy and reprioritization of the efforts of the company’s product and technology teams.
The Company began a restructuring program (the “2024 Restructuring Program”) during the three months ended March 31, 2024 to drive our enterprise strategy and reduce our cost structure. Source: 10-Q
The major initiatives of the first phase, which commenced in the three months ended March 31, 2024, include: 1) optimizing our management hierarchy, which includes a reduction in workforce; and 2) reprioritizing the efforts of our product and technology teams, resulting in the impairment of certain internally developed software projects. Source: 10-Q
In my view, as a result of these efforts, we could see improvements in the FCF margin growth in the coming years. Besides, I believe that new investors may research the company as soon as they learn about the new 2024 restructuring program. Demand for the stock could lead to increases in the stock price.
There Is A Stock Repurchase Plan, Which May Accelerate The Demand For The Stock
The company did acquire a number of shares in the open market in 2023, and I believe that new acquisitions could be made in the coming years. According to the last 10-Q, there are still close to 6.7 billion shares remaining for future repurchases.
As of March 31, 2024, there were 6,763,445 shares remaining for future repurchases. Repurchases can be made in the open market or in privately negotiated transactions, including Rule 10b5-1 plans and accelerated repurchase programs. Source: 10-Q
In my view, new stock repurchases may bring demand for the stock. Other investors may also buy shares because the company is buying. I do not think that companies out there buy shares when their shares are expensive. In this case, it is also worth noting that the company is even using debt facilities to buy shares and distribute dividends.
We expect to use our current debt facilities and potentially other indebtedness incurred in the future to assist us in continuing to fund working capital, capital expenditures, possible acquisitions, dividends, share repurchases or other investments. Source: 10-Q
FCF Driver 2: Digital Transformation And Artificial Intelligence Tools Currently Being Used Could Accelerate FCF Margin Growth
Robinson’s growth strategy has been consolidated in its global logistics system through subcontracted agents, and at present the objective is to continue deepening the relationship with its clients, while continuing to address the need to adapt to a global context that strongly conditions logistics services. Recently, the main changes in this regard have to do with the incorporation of new professionals to its management team, oriented towards the digital transformation of the business, and the integration of logistics chain automation tools.
The company launched several tools that include AI, data management, and business analytics software, which may accelerate net sales growth and operating margin growth. Among the most relevant tools, there are Navisphere, Procure IQ, and others. It is also worth mentioning that the company is also investing in new tools, such as Emissions IQ, to reduce and control carbon emissions.
Navisphere offers sophisticated business analytics, artificial intelligence, and data driven tools to improve supply chain performance and meet increasing customer demand. Source: 10-k
Procure IQ , which uses algorithms built by our data scientists and the largest freight shipment dataset in the industry to show shippers the optimal way to purchase transportation in each of their shipping lanes. Source: 10-k
With Successful FCF Drivers, My Best Case Scenario Implied A Valuation Of $100
Based on the previous assumptions, I made the following estimates on various key financial aspects. For net income, we project a 2034 figure close to $544 million. From 2024 to 2034, the median net income margin stands at close to 10.26%.
To calculate the CFO, I considered 2034 depreciation and amortization of $938 million, with a provision for credit losses of at least -$36 million and a stock-based compensation of $642 million. In addition, the assumptions include the deferred income taxes of -$453 million, the excess tax benefit on stock-based compensation of -$110 million, and the loss on disposal group held for sale close to $151 million.
Other operating activities of $52 million are also included. Regarding receivables, changes in receivables are estimated at $2,736 million, and changes in contract assets stand at close to $155 million. 2034 Prepaid expenses and others are expected to reach -$385 million in 2034, while right of use assets stand at $327 million.
Besides, changes in accounts payable and outstanding checks would be close to -$1,647 million, with accrued compensation of close to -$856 million, accrued transportation expense of -$126 million, and accrued income taxes close to -$26 million.
In addition, it is estimated that other accrued liabilities amount to -$102 million, accompanied by 2034 lease liability of -$299 million and other assets and liabilities of $149 million. With these figures, 2034 CFO would be close to $1,665 million. After deducting an approximate capex of $769 million, we obtain 2034 FCF of $895 million.
With a WACC of 6.60%, NPV of future FCF would be around $3,773 million. With an EV/FCF of 22x, the terminal value would stand at $19.7 billion.
Finally, the implied EV would be close to $13.52 billion. Discounting the net debt of $1.5 billion, the equity would be $11.9 billion. If we divide this equity by 119 million shares outstanding, we obtain a price per share of $100. These estimates were based on my assumptions provided in this report.
My Worst Case Scenario Includes Failure Of Previous Assumptions
Under this scenario, I assumed that 2034 net income would be close to $290 million, so that net income margin growth would be close to 3.74% from 2024 to 2034. I also considered 2034 depreciation and amortization of $773 million, along with a provision for credit losses of at least -$31 million and a stock-based compensation of $511 million. It is worth noting that my numbers are not far from the figures reported by the company in the past.
In addition, I took into account the deferred income taxes of -$358 million, plus the excess tax benefit on stock-based compensation of -$89 million and the loss on disposal group held for sale close to $131 million. In addition, other operating activities are estimated at $46 million, while changes in receivables are estimated at $2,363 million, with contract assets of $122 million.
Furthermore, with 2034 prepaid expenses and others of around -$317 million, I expect changes in accounts payable and outstanding checks close to -$1,292 million, with changes in accrued compensation of -$760 million, accompanied by accrued transportation expense of -$99 million. My results include 2034 CFO of $1.330 billion, with capital expenditure of $621 million and 2034 FCF of about $709 million.
With a WACC of 8%, which I believe is conservative, the NPV of future FCF would be close to $3.727 billion. Now, with an EV/FCF of 21x, the NPV of the TV would be close to $4.869 billion, and the EV would stand at $10.11 billion. With net debt of $1.5 billion, the equity would be close to $8.5 billion, which would imply a total valuation of $72 per share.
Competitors
Even though it is one of the largest logistics services companies internationally, Robinson operates in a highly competitive market, in which there are different types of agents that do not necessarily offer the same amount of services as the company. This includes, in addition to traditional logistics companies, companies that offer digital services for the creation of supply chain strategy and management, transportation companies, brokers, and cargo owners among others.
In any case, due to the experience and recognition of the company, the network and relationship with its clients, the international scope of its services, and the information and technology values that the company has, in my view, Robinson has the virtues to continue its growth in the field of logistics and the distribution of fruit and vegetable products.
Risks
Among the risks that exist for the company, we must take into account the high competition in the sector, the exposure to fluctuations in transportation fuel prices, the volatilities inherent to international operations, and the great dependence that the company has on third parties.
To this, we can add that by 2023, 35% of its income came from trading with its 100 largest clients, which indicates a certain lack of diversification in this sense, taking into account that these clients are not obliged to continue or renew contracts at any time in future. In addition, the integration of the acquisitions infrastructure and the retention of top talent are also risk factors to take into account in the case of this company.
When it comes to legislation, there is always a risk present in local regulations for the operations of foreign companies, as well as possible future changes in legislation on the use of fuel for transportation. Finally, a situation of inconsistency in the company’s financial debt can generate problems or complications in access to lines of credit or own capacity for investment and development.
Given the company’s business model, I believe that changes in the labor market may affect future operating margin and FCF margin growth. If the company cannot find talent, or hiring becomes more expensive, I believe that the company’s cash flow may not grow as expected under my best case scenario.
Our continued success depends upon our ability to attract and retain motivated logistics professionals. In order to maintain high variability in our business model, it is necessary to adjust staffing levels to changing market demands. In periods of rapid change, it may be more difficult to match our staffing level to our business needs. Source: 10-k
The company also reports certain net sales outside the United States. In my view, changes in tariffs, new trade agreements, or changes in the taxation may diminish future FCF growth.
Our international operations subject us to operational, financial, and data privacy risks. We provide services within and between foreign countries on an increasing basis. Our business outside of the U.S. is subject to various risks. Source: 10-k
I would also expect challenges with respect to M&A integration of targets acquired. Besides, if the company does not obtain the synergies expected, or the assets acquired are not as valued as expected, I would expect impairments. As a result, I believe that the book value per share would decline, and future FCF expectations may also decline.
We may have difficulties integrating acquired companies. For acquisitions, success depends upon efficiently integrating the acquired business into our existing operations. If we complete a large acquisition or multiple acquisitions within a short period of time, we may experience heightened difficulties integrating the acquired companies. Source: 10-k
Conclusion
Robinson Worldwide reports a number of tools using artificial intelligence technologies to solve supply chain issues and improve performance. The company is also making restructuring efforts, which I believe could have a beneficial impact on future FCF growth and operating margin growth. Besides, the company seems to have a beneficial balance sheet, which may allow the acquisition of more M&A targets. I do see some risks coming from the action of competitors, new tariffs, tax changes, failed acquisitions, or changes in the price of fuel. With that, I believe that the company appears undervalued.