“In actuality, the ELD mandate has seen companies in a broad array of industries, from retailers to consumer products companies to heavy manufacturers, suddenly scrambling to find anyone with capacity to carry their goods, while finding that their shipping costs were rising dramatically when they did secure a carrier. Throughout 2018, it has been nearly impossible to listen to any quarterly earnings call with a company shipping any sort of product without hearing complaints about difficult shipping conditions. The spot market, where customers arrange for real-time, one-off shipments as needed, has been especially hard hit, with pricing running over +20% higher year- over-year for the last few quarters, at times approaching even +30%. Contract pricing – where customers will agree routes and prices, usually for an annual period – also has been very strong, in some cases reaching double-digit percentage gains. C.H. Robinson, as a transportation broker whose largest business is in long-haul trucking, would seem to be an obvious beneficiary of these market trends.
Investors noted the rising spot pricing in the truckload industry, which actually started moving a few quarters before the ELD deadline and jumped into C.H. Robinson much earlier than we had expected, and, indeed, earlier than it made much sense. Then, as the company proceeded to badly miss reported earnings for several quarters, while trucking industry fundamentals around it seemed very strong, the market suddenly became disenchanted with the company, causing its stock to take a roughly -20% hit in an otherwise surging market. This was the point when we finally became interested, because we think the market has missed a few things about this business model.
First, as we have seen in prior periods with a sudden reduction in truckload capacity, Robinson’s pricing philosophy generally sees them taking a significant margin hit for a period of time as trucking capacity tightens, plus the concomitant rise in spot pricing. Robinson favors annual contracts with their customers, while their costs (mostly spot) rise immediately, meaning there is a mismatch between rising spot pricing they are paying to trucking providers, and the contractual pricing they are receiving from their customers. This is why the company was not able to keep up with investors’ expectations as truckload fundamentals strengthened in front of the ELD deadline. We, on the other hand, had been expecting this cost/pricing mismatch, as we had experienced it in prior cycles, as illustrated below.
Second, after a great run in most stocks across the trucking industry (despite the shorter-term pullback seen for C.H. Robinson), many investors now seem to be taking their gains, with a broad narrative about the cycle being as good as it can get. We do not believe this narrative, especially as it pertains to C.H. Robinson, for two primary reasons:
- We believe the most important driver of the shortage of supply vs demand in the trucking industry is not cyclical strength (i.e. demand); we believe the most important driver of the supply/demand imbalance is secular in nature (i.e. a significant and immediate reduction in supply caused by the ELD mandate, which will take years to rebalance in any meaningful way). While rising demand definitely has played a part in the imbalance, and while economic weakness would be unhelpful, we see the industrial economy strengthening in the near term, if anything. More importantly, long-haul trucking holds the vast majority of share of U.S. transportation volumes, and we believe that only small bits of this volume can find its way to other modes of transportation, such as rail or air, without a major rethinking and overhaul of domestic supply chains. In short, we believe a supply/demand imbalance is here to stay for the foreseeable future in long-haul trucking, and this should lead to pricing strength, improving margins and returns, and sustained solid earnings growth across the industry.
- Robinson hasn’t even enjoyed the benefits of the tightening trucking market yet; in fact, has only managed to get on the right side of the cost/pricing equation in the most recent quarter, as the table above illustrates – and the benefits will begin appearing now. As annual contracts with outdated pricing roll off and are renegotiated at higher, current market pricing, Robinson finally will see margins, earnings, and cash flow growth rebounding. Furthermore, while we expect trucking providers to continue to enjoy rising pricing power, we expect pricing to rise at a lesser rate, meaning that Robinson most likely will enjoy a period during which the pricing they are charging to customers will be rising at a significantly greater rate than the pricing they are paying to their trucking
With valuation sitting only at roughly average historical levels, in comparison to the broad market trading at elevated historical levels, and with company fundamentals only inflecting positively just now and looking to remain healthy for the foreseeable future, we view C.H. Robinson is an attractive home for our clients’ capital.”
Continuing further with our analysis of the company, we’ll now take a glance at the latest hedge fund action encompassing C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW).
What have hedge funds been doing with C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW)?
At the end of the third quarter, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards CHRW over the last 13 quarters. With the smart money’s capital changing hands, there exists a select group of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
The largest stake in C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) was held by Luminus Management, which reported holding $84.3 million worth of stock at the end of September. It was followed by AQR Capital Management with a $70.3 million position. Other investors bullish on the company included Anchor Bolt Capital, Millennium Management, and Renaissance Technologies.
Since C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) has faced falling interest from hedge fund managers, we can see that there were a few money managers that elected to cut their full holdings last quarter. It’s worth mentioning that Anand Parekh’s Alyeska Investment Group dumped the biggest stake of the 700 funds watched by Insider Monkey, comprising an estimated $7.6 million in stock. Robert Pohly’s fund, Samlyn Capital, also dumped its stock, about $5 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 2 funds last quarter.
Let’s also examine hedge fund activity in other stocks similar to C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW). We will take a look at United Rentals, Inc. (NYSE:URI), Eastman Chemical Company (NYSE:EMN), CDW Corporation (NASDAQ:CDW), and Yum China Holdings, Inc. (NYSE:YUMC). This group of stocks’ market valuations are similar to CHRW’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| URI | 48 | 1131355 | 8 |
| EMN | 25 | 455394 | -2 |
| CDW | 28 | 627369 | 8 |
| YUMC | 26 | 386742 | 6 |
As you can see these stocks had an average of 32 hedge funds with bullish positions and the average amount invested in these stocks was $650 million. That figure was $458 million in CHRW’s case. United Rentals, Inc. (NYSE:URI) is the most popular stock in this table. On the other hand Eastman Chemical Company (NYSE:EMN) is the least popular one with only 25 bullish hedge fund positions. C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard URI might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
