The C.H. Robinson (CHRW) Short Thesis

The freight brokerage market is interesting. C.H. Robinson is the world's largest, with 60% of revenue coming from Truckload (TL) brokerage commissions. Most companies report Sales - COS = Gross profit, but CHRW reports it as "Net revenue," and hence, "Net revenue margin" is the spread between what they are paid by shippers and what they pay to carriers for transportation. That spread seems way too high - a 15-20% cut!

There's been a short thesis on CHRW based on two things: 1) Net revenue margins declining into a more balanced market, and 2) The threat of disintermediation from new VC-backed tech players such as Uber Freight, Convoy Inc (backed by Jeff Bezos), Transfix, and others. It seems like the net revenue margin thesis has already played itself out - margins peaked in early 2016 and declined to ~15.5% before rebounding late last year. 4Q17 was the first quarter since 2016 in which pricing outpaced cost, so I'm sure bulls think margins are going to turn around going into 2018, which happens to be the tightest trucking market in history. Freight brokers do best in times of extremes - either when utilization is tight (shippers pay them to find capacity) or when utilization is loose (carriers pay them to find loads). Logically, this means CHRW should do well in 2018. The huge driver shortage, implementation of the Electronic Logging Device (ELD) mandate in December 2017 and enforcement in April 2018, and overheating economy should lead to a fun year for the trucking industry. The question is, will CHRW be able to pass on double-digit spot price increases in transportation and re-negotiate their contracts to reflect the spot market? If they can, the short thesis doesn't matter. On the other hand, if this time truly is different, and they can't pass on price increases, we should see net revenue margins decline to historical lows, but volumes will likely pick up the slack. I'm not sure the market will care if that happens - people like the asset-light, high-ROIC model.

The other part of the short thesis - disintermediation by new tech players - is even more interesting. In my initial DD, I'm leaning toward CHRW's favor. The scale and entrenched relationships they've built over the years will take a long time for the likes of Uber Freight and others to build. Long-term, I'm sure they can do it (and we're all dead), but this is such a fragmented market that it might not even matter.

This is a curious case for me. The questions we need answered are: 1) Will net revenue margins continue to decline in a tight trucking capacity market? What impact will the ELD have on freight brokers if capacity is down 5-10% and most importantly, will CHRW be able to pass on price increases in a surging spot TL market? 2) Are competitors a near-term threat to incumbent freight brokers such as CHRW? How much scale do competitors such as UberFreight and Convoy need to be a legitimate threat? I have some calls set up with the new players and will be doing more work in the coming weeks. Stay tuned.