In today’s stock market, everyone wants to reinvent themselves–and trucking companies are no exception.
As an industry, trucking has been such a poor investment over the past five years that many companies have simply dropped “trucking” and added “logistics” to their names. Unlike their traditional counterparts, logistics firms take a cradle-to-grave approach when it comes to managing freight.
Not only will they move packages from Point A to Point B, but third-party logistics providers (or 3PLs, as they are known) add value by offering warehousing management, consulting services, order fulfillment, even return management, to their customers.
And those customers, eager to focus on their own core competencies, continue to outsource their supply chain management in record numbers. By some estimates, logistics was a $45 billion industry in 1999, and promises to grow another 20 percent this year.
But are these new logistics firms simply old trucking companies peddling new business cards? Not all of them, says analyst Jeff Medford, noting that companies such as C.H. Robinson Worldwide, Inc. (Nasdaq: CHRW), Expeditors International (Nasdaq: EXPD) and Eagle USA Airfreight, Inc. (Nasdaq: EAGL) have risen to the forefront in various niches in the 3PL arena.
“They have evolved from what I have considered freight-forwarding expertise . . . and break (logistics) into 10 segments,” said Medford, a principal of William Blair in Chicago. “Over the next five years, we’re going to see much more consolidation in terms of those 10 segments. We’ll probably see fewer companies, and bigger companies, all doing a broader breadth of services.”
The other wild card that could change the industry’s complexion is the Internet. Companies such as National Transportation Exchange and PFSWeb, Inc. (Nasdaq: PFSW) have debuted as on-line “transaction management services.”
“There are people who would suggest that over time, in any industry, the Internet will potentially make the middleman less valuable,” Medford said. “This presents the biggest potential opportunity and risk, depending on how each individual company attacks that way of doing business.”
Outsourcing remains the single biggest growth driver for the logistics industry. Analyst Dan Moore said that manufacturers and retailers are coming to realize that they shouldn’t be in the transportation business since it’s not their key strength. Handing off logistics to a third party can mean better pricing–and fewer headaches. That’s especially true as the economy continues to grow globally.
“Over the last several years, we’ve seen an increased willingness on the part of shippers to more or less contract with third parties to handle a portion, if not all, of their logistics needs,” said Dan Moore, a transportation analyst with Stephens, Inc. in Little Rock, Ark. “As you have . . . traditionally domestic-based companies becoming more and more global in nature, they’re even less suited to provide the same level of service that a third-party specialist would be able to provide.”
That’s where companies like C.H. Robinson step in. Moore places the Minnesota-based logistics firm as his “top pick in our 15 to 16 company transportation universe,” rating the shares a “buy.” The $2.26 billion firm operates more than 125 offices in North America, Latin America and Europe, handling logistics for more than 10,000 customers worldwide. Moore said the company’s return on invested capital tends to be extremely high, in the 40 to 45 percent range, and it doesn’t have exposure to fluctuations in fuel prices that asset-based companies do.
Analyst Marty Beskow is also bullish on C.H. Robinson, recently upgrading the stock to a “strong buy.” The equity research analysts at U.S. Bancorp Piper Jaffray in Minnesota said that the company fuels its growth by enticing larger and larger chunks of business from blue-chip customers such as Wal-Mart Stores, Inc., PepsiCo Inc. and Anheuser-Busch Companies, Inc. Moore said that’s only natural.
“The larger shippers tend to go with the more recognized names in the industry,” Moore explained. “If you’re going to hand off $300 million in logistics to a 3PL, you want to make sure that company is clearly capable of managing your network and improving your services. That really gets down to a select number of participants.”
Beskow also rates Expeditors a strong buy, calling them the “premier international 3PL.” He estimates Expeditors, which has been snatching market share from its competitors, will earn $1.35 per share in 2000 and $1.65 in 2001.
“They’re very good at growing the top line, and they’re a very, very steady performer,” he said. “They’ve consistently been increasing net revenues at least 20 and as much as 25 percent a year.”
Medford gives a “buy” rating to Expeditors, complimenting its college recruitment and employee training programs. He said the culture is similar at Eagle USA, which he also rates as a “buy.” Eagle USA, which saw sales jump nearly 43 percent to reach $595.2 million in fiscal 1999, focuses more in the domestic marketplace.
Fritz Companies, Inc. (Nasdaq: FRTZ) is also one of the largest publicly traded players in the logistics market. Beskow rates its stock a buy, noting that the company recently brought in new management to help turn around the company.
“They made a lot of acquisitions a few years ago and they have had some issues with integrating those operations,” Beskow said. “They’re concentrating on controlling costs and managing their internal operations. They have a great plan in place as to how they’re going to go about doing it.”
Still, he expects the company will take a 15-cent charge against fiscal 2000 earnings spread over the third and fourth quarters. Without that charge, he estimates earnings would be close to 60 cents per share in 2000, growing to 85 cents per share in fiscal 2001.
The picture’s less rosy for some of the more traditional asset-based companies.
The recent spike in fuel prices caused Stephens, Inc. to downgrade logistics and trucking firms that own and operate their own rigs. Moore rates both CNF Transportation, Inc. (NYSE: CNF) and J.B. Hunt Transport Services, Inc. (Nasdaq: JBHT) as neutral, even though he expects double-digit sales growth at both firms this year.
Both logistics and traditional trucking companies now face competition from a third source: on-line logistics firms. Beskow said that companies such as National Transportation Exchange offers a matchmaking service for trucking companies in search of freight–and vice versa–while PFSWeb and CyberSource Corp. (Nasdaq: CYBS) both offer a host of e-logistics capabilities.
“This is still very early in the game, and a lot of the Internet companies don’t really have the capacity or the breadth that they would need,” Beskow said. “They are something to watch out for, though. Once they reach critical mass, the market’s probably going to clear them out.”
