“So bad, it’s bad,” wrote Deutsche Bank analyst Amit Mehrotra. “Meaningfully worse than expected,” complained UBS analyst Thomas Wadewitz. “The magnitude of the miss and the weakness of the October guide will still come as a significant surprise,” Morgan Stanley analyst Ravi Shanker observed. “Forward trends look to remain quite weak,” Goldman Sachs analyst Jordan Alliger wrote.
Yesterday, October 29, after markets closed, C.H. Robinson (NASDAQ: CHRW) reported its results for the third quarter, which FreightWaves covered here. Earnings growth went negative for the first time in years, and, more importantly, Robinson did not effectively manage expectations, missing Wall Street’s estimates on revenue and profits.
After the call, equities research analysts issued a rash of notes to their clients, putting Robinson’s weak performance in context and trying to sort out the larger implications ahead of the company’s conference call, which will take place later this morning (October 30).
Mehrotra noted that Robinson’s earnings would have been even worse after backing out of some transitory benefits like favorable taxation and proceeds from a real estate transaction.
“Underlying EPS [earnings per share] were about $1 per share when normalizing the tax rate and backing out a gain from an office building sale (vs. cons of $1.14 and our estimate of $1.20),” Mehrotra noted, citing an even lower number than the non-GAAP $1.07/share Robinson reported.
Despite massive investments in technology, “opex leverage was nonexistent,” Mehrotra pointed out, calling out the fact that C.H. Robinson actually grew headcount by 3.2% as revenue fell and selling, general and administrative expenses grew, even after excluding the growth in headcount.
“Unfortunately current negative trends for brokers are expected to continue, which likely means shares will be range-bound at reasonably lower levels. Maintain Hold,” Mehrotra concluded.
UBS’ Wadewitz was alarmed that “pressures are greater vs. prior cycles,” noting that “the magnitude of the year-over-year [y/y] decline in both CHRW’s net revenue and its EPS (-15% y/y in the third quarter) are both greater than we have seen in prior cycles. Looking at the most recent period of cyclical pressure in 2016/1H17, the worst y/y net revenue decline was -5% in the third quarter of 2016 and -3.4% y/y in the second quarter of 2017.”
For those reasons, Wadewitz cut his estimates of C.H. Robinson’s 2020 earnings per share by 11% to $4.10 from $4.60. Prior to the earnings release, the consensus expectation on Wall Street was for Robinson to earn $4.82/share in 2020.
One of the challenges to Robinson’s long-term strategy of ramping its technology spend to drive productivity gains and continue to protect its moat from digital and private equity-backed competitors is that the significant hit to net earnings is prompting analysts to ask how Robinson can cut costs. The conversation has apparently shifted from Wall Street being encouraged by large investments in technology to investors’ concern that Robinson needs to prop up its profits.
“We believe higher technology spend was a source of upward pressure on opex in the third quarter,” Wadewitz wrote in an investor note. “Given the difficult net revenue backdrop, a key question is how rapidly can CHRW reduce expenses?”
Morgan Stanley’s Ravi Shanker was perhaps the most bearish on C.H. Robinson’s results, pointing out that Robinson’s aggressive bidding for contract freight did not result in positive volume growth.
“If pricing was sacrificed for the sake of volume growth, that did not show up in the third quarter,” Shanker wrote. “There is no doubt that this is a very tough market in regards to volume but we expected more volume traction as a result of more aggressive pricing.”
Notably, Shanker cited secular as well as cyclical pressures, which include pricing competition from new players – which is real but perhaps sustainable – and a potential shift in shipper preference toward asset-based carriers, which we see no hard evidence of.
“We believe the third quarter miss reflects both the cyclical headwinds that CH is under plus secular pressures from increasing price competition from new players as well as potential structural market shifts away from brokers toward asset-based carriers,” Shanker wrote.
The Morgan Stanley analyst agreed with his Deutsche Bank colleague that it may be time for C.H. Robinson to rein in costs.
“It may also be time for CHRW to take a more proactive approach with headcount and costs,” Shanker suggested.
Alliger’s ‘first take’ investor note was brief; Goldman Sachs typically waits until after speaking with management during the conference call to update its model. Still, Alliger cited both internal operating metrics as well as external competitive pressures as reasons why the quarter disappointed.
“Net revenue per employee (an important efﬁciency metric for CHRW) was also worse in the quarter, dropping by 11% y/y, vs. our expectations of -1%,” Alliger wrote.
“Unfortunately, according to the quarterly presentation, the forward trends look to remain quite weak for CHRW as management cited aggressive competition and soft spot market freight opportunities,” Alliger concluded, before acknowledging the only positive takeaway he could think of – October truckload volumes per business day are flat.