Monday morning, Stifel’s J. Bruce Chan announced that the bank was resuming its coverage of a group of large, publicly-traded 3PLs, including CH Robinson (CHRW - Nasdaq), XPO (XPO - NYSE), Echo Global Logistics (ECHO - Nasdaq), Landstar (LSTR - Nasdaq), and Universal Logistics Holdings (ULH - Nasdaq), with a flurry of research notes on each of the companies.
A common theme in Stifel’s notes was the historically tight capacity environment that U.S. freight markets are currently experiencing: in the reports, Chan characterized capacity tightness as ‘secular’ and ‘structural’, implying that for the foreseeable future, shippers will be forced to rely on brokers to source capacity.
Stifel rated CH Robinson a ‘buy’ with a price target of $101 (20x estimated 2019 earnings per share), XPO a ‘hold’ with a price target of $118 (27x estimated 2019 EPS), Echo a ‘buy’ with a price target of $34 (18x estimated 2019 EPS), Landstar a ‘hold’ with a price target of $123 (17.8x estimated 2019 EPS), and Universal Logistics a ‘hold’ with a price target of $27 (16x estimated 2019 EPS).
Chan appeared to be particularly excited by XPO Logistics’ growth outlook, even though Stifel gave the 3PL a ‘hold’ rating. Chan explained that CEO Brad Jacobs announced in the company’s Q3 2017 earnings call that XPO would re-enter the acquisitions market with an $8B war chest after a year long break, and that top-line revenue growth from a potential large deal was already priced into XPO stock. Still, management has given guidance for 5-8% organic revenue growth over the next few years, and Stifel believes that if the current freight environment holds, that target could prove to be conservative.
One of the keys to XPO’s success is its CEO Brad Jacobs, who previously consolidated waste management and equipment rental businesses into multi-billion dollar enterprises. In his narrative of XPO’s history to date, Chan recounted the story of XPO and how it started as a pure truckload brokerage. Jacobs quickly realized that there were other large, heavily technologized competitors in the space like CH Robinson and Echo, making it difficult to find acquisitions while maintaining his strict valuation discipline. So XPO pivoted to other kinds of services, including contract logistics, value-added warehousing and LTL, trying to find market share by offering a broader range of services.
CH Robinson, though, is still the largest North American provider of freight brokerage by a factor of three. Chan wrote, “scale matters, in our view, in terms of providing a rich network with density of freight and capacity.” Particularly impressive was CH Robinson’s Navisphere operating platform, which Chan detailed.
“Ostensibly, Navisphere is used to match customer needs with supplier capabilities, to collaborate with other offices, and to utilize centralized support resources to complete all facets of the transaction,” wrote Chan. “But the system goes much deeper, linking customers, employees, and service providers with powerful algorithms, artificial intelligence, and machine learning to produce real time analytics, order and route optimization (factoring things like traffic, news, and weather to anticipate potential delays), purchase order management, full supply chain visibility across multiple modes, automated route guidance, freight payment and auditing, and inventory management, among other functions, through online web portals, mobile access, or electronic integration (via Electronic Data Interchange/EDI or Application Programming Interface/API connectivity) into the users’ own systems,” Chan wrote.
Beyond its technological prowess, CH Robinson executives believe that the current stage of the transportation supply/demand cycle favors their margins. As freight markets around the country began heating back up in May, brokers’ margins were squeezed because spot rates were outrunning their contracts with shippers. In other words, CH Robinson was buying loads from shippers at one price but being forced to buy capacity from carriers at a higher price. Now, though, CH Robinson says it has been able to reprice its contract freight and get back out ahead of spot rates, protecting its margins once again.
CH Robinson’s digital investments are paying off, but Stifel still regards Echo Logistics as the “OG Disruptor,” the first big brokerage founded by tech veterans in early 2005. Still, Chan writes that the next wave of digital brokerages—companies like Convoy, Transfix, FR8, Load Express, and Freight Rover—will not be able to dislodge Echo.
“The competitive threat from digital startups is overplayed, in our view. Echo has been investing heavily in technology, and has the benefit of better data, the right personnel to service customers, network scale, and an understanding of shipper pinch points,” wrote Chan. “These attributes take substantial time and investment to build, in our view, and give the company a competitive advantage that is often overlooked by investors in the excitement for digital change,” Chan wrote.
Other positives for Echo include its completed integration of Command Transportation, an acquisition that gave Echo a much enhanced ability to broker truckload freight in addition to its LTL core business. Chan wrote that ‘Command’ is rarely heard nowadays in Echo’s Chicago headquarters, suggesting that the company has been totally absorbed and management has resumed its focus on smaller M&A to supplement organic growth.
Finally, Chan wrote that Echo’s “team of experienced sales representatives, valued for their ability to solve customer problems and speed and facilitate transactions, is extremely difficult to replicate, in our view.” The average sales rep at Echo now has a tenure of nearly 34 months, up from about 20 months at the beginning of 2015. As the sales team gains experience, they become more valuable—Stifel published a chart built from data provided by Echo that shows that gross profit per rep grows sharply, even exponentially, as they gain experience, from about $250K per month at 24 months to $500K per month at 36 months, and $1M at 60 months.
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