Still Avoiding C.H. Robinson

shaunl

It's been astir 8 ½ months since I recommended investors proceed to avoid C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW), and successful that time, nan shares are down astir 6.7% against a nonaccomplishment of astir 2.65% for nan S&P 500. The institution has evidently posted results since, truthful I thought I'd reappraisal nan name. After all, an finance priced astatine $100 is, by definition, little risky than nan aforesaid finance priced astatine $109. I'll reappraisal nan latest financial results, and will look astatine nan valuation to spot if it's worthy buying astatine nan moment, fixed nan multiplicity of consequence present.

We're each engaged people. I'm judge immoderate of you person to activity retired which supermodel you're going to bent retired pinch this weekend, and immoderate of you are putting nan finishing touches connected nan drawstring mentation article you're astir to nonstop disconnected for publication. For my part, I've sewage astir 100 hours of Young and nan Restless to drawback up on, and I can't hold to find retired really Chance Chancellor reacts to Abby's infidelity. Anyway, we're each busy, and portion of nan measurement I effort to make your reference acquisition arsenic pleasant arsenic imaginable is to connection nan "gist" of my reasoning upfront, truthful you tin limit your vulnerability to "Doyle mojo" to nan absolute minimum. You're welcome. I'm of nan position that investors would beryllium wise to proceed avoiding C.H. Robinson stock. The institution is rolling complete $1 cardinal of indebtedness this year, and, arsenic you whitethorn beryllium aware, liking rates this twelvemonth are higher than they person been previously. Additionally, nan institution whitethorn beryllium charged a higher liking complaint when influential firms commencement yet downgrading nan stock. In nan teeth of this, nan shares aren't objectively cheap. Worst of each successful my view, investors successful this stock, pinch nan big of risks that travel pinch that investment, are receiving ~225 ground points little income than they would if they bought nan 10-Year Treasury Note. Taking connected much consequence to person little income than nan risk-free complaint makes very small consciousness to me, and for that reason, I would urge continuing to eschew these shares.

Financial Snapshot

I deliberation nan astir caller financial results present person been alternatively good, actually. Specifically, compared to 2021, gross and nett income successful 2022 are up by astir 7% and 11.4% respectively. Given nan colossal buyback programme of $1.359 cardinal complete nan past year, nan number of shares outstanding has dropped by astir 9.5%. The upshot of this is that EPS is up by astir 17.25% successful 2022 compared to 2021. The 1 point that does siren maine from nan income connection is nan truth that liking expenses person climbed by astir 67% complete nan year, from $59.8 cardinal successful 2021 to complete $100 cardinal successful 2022.

I deliberation it whitethorn person been wiser for guidance to person knocked down immoderate of nan $1.973 cardinal of indebtedness pinch nan $1.359 cardinal that they spent connected buybacks. I deliberation buybacks were particularly ill-timed, fixed nan size and timing of contractual obligations, per nan following, plucked from page 35 of nan latest 10-K for your enjoyment and edification:

C.H. Robinson Cash Obligations (C.H. Robinson latest 10-K)

We spot from nan array that nan institution is connected nan hook to rotation astir $1.074 cardinal of its indebtedness this year, including in installments agreements and semipermanent notes payable. If you've been pursuing nan financial news, you cognize that liking rates are comparatively higher this twelvemonth than they person been successful nan past, and truthful I don't deliberation it's unreasonable to fret that liking disbursal will proceed to emergence successful nan future.

Digging deeper into nan superior structure, indebtedness isn't overmuch worse than it was successful 2021, but it is overmuch higher than it was successful nan pre-pandemic era. Specifically, astatine nan extremity of 2019, indebtedness was astir $1.092 billion, and coming it's astir $881.3 cardinal higher than that. An 80% summation successful a fewer years is troubling successful my view. I deliberation nan shares should beryllium discounted to bespeak nan consequence from higher indebtedness levels, and nan imaginable for early higher liking rates. The indebtedness doesn't disqualify this from consideration, but investors should beryllium compensated.

All that written, I deliberation nan dividend is reasonably good covered, fixed that dividend payments correspond only astir 30% of nett income, and nan payout ratio is presently only astir 7%. Given nan above, I'd beryllium happy to bargain this institution astatine nan correct price.

C.H. Robinson Financials (C.H. Robinson investor relations)

The Stock

My regulars cognize that I've talked myself retired of immoderate profitable trades pinch nan words "at nan correct price." Missing upside is evidently not ideal, but I'm of nan position that it's amended to miss retired connected immoderate gains than suffer capital. My regulars besides cognize that I see nan "business" and nan "stock" to beryllium rather different things. Every business buys a number of inputs and turns them into a last merchandise aliases service, for illustration freight transportation. The stock, connected nan different hand, is an ownership liking successful nan business that gets traded astir successful a marketplace that aggregates nan crowd's quickly changing views astir nan early wellness of nan business, early request for logistics services, etc. The banal besides moves astir because it gets taken on for nan thrust erstwhile nan crowd changes its views astir "the market" successful general.

This banal value volatility driven by each these factors and much is troublesome, but it's a imaginable root of profit because these value movements person nan imaginable to create a disconnect betwixt marketplace expectations and consequent reality. In my experience, this is nan only measurement to make profits trading stocks: by determining nan crowd's expectations astir a fixed company's performance, spotting discrepancies betwixt those assumptions and banal price, and placing a waste and acquisition accordingly. I've besides recovered it's nan lawsuit that investors do better/less severely erstwhile they bargain shares that are comparatively cheap, because inexpensive shares correlate pinch debased expectations. Cheap shares are insulated from nan buffeting that much costly shares are deed by.

As my regulars know, I measurement nan comparative cheapness of a banal successful a fewer ways. For example, I for illustration to look astatine nan ratio of value to immoderate measurement of economical value, for illustration earnings, sales, free cash, and nan like. I for illustration to spot a institution trading astatine a discount to some nan wide market, and to its ain history. In lawsuit you request to beryllium reminded, erstwhile I past reviewed C.H. Robinson, nan PE was sitting astatine astir 15.5 times. Fast-forward respective months and nan shares are really astir 11% cheaper per nan following:

Data by YCharts

The problem for maine relates to nan truth that nan dividend output is presently astir 225 ground points little than nan risk-free rate.

Data by YCharts

As my regulars know, successful bid to validate (or refute) nan thought that nan shares aren't objectively cheap, I want to effort to understand what nan crowd is presently "assuming" astir nan early of a fixed company. If nan crowd is assuming awesome things from nan company, that's a motion that nan shares are mostly expensive. If you publication my articles regularly, you cognize that I trust connected nan activity of Professor Stephen Penman and his book "Accounting for Value" for this. In this book, Penman walks investors done really they tin use nan magic of precocious schoolhouse algebra to a modular finance look successful bid to activity retired what nan marketplace is "thinking" astir a fixed company's early growth. This involves isolating nan "g" (growth) adaptable successful this formula. In lawsuit you find Penman's penning a spot dense, you mightiness want to effort "Expectations Investing" by Mauboussin and Rappaport. These 2 person besides introduced nan thought of utilizing nan banal value itself arsenic a root of information, and past infer what nan marketplace is presently "expecting" astir nan future.

Anyway, applying this attack to C.H. Robinson astatine nan infinitesimal suggests nan marketplace is assuming that this institution will now turn profits astatine a complaint of astir 6% from here. That is excessive successful my view, particularly fixed nan wide illness successful nan value of shipping we've seen recently. Given nan truth that an tremendous magnitude of indebtedness is being rolled astatine a higher complaint this year, and fixed that nan shares are not objectively cheap, and fixed that shareholders would person astir 2.25% much from nan risk-free complaint than from nan stock, I can't urge buying these shares astatine nan moment. I deliberation nan preservation of superior is of captious importance, and for that reason, I deliberation superior would beryllium amended invested elsewhere.

I'm a quant finance newsletter writer who marries basal study pinch nan latest investigation successful momentum. Over nan past fewer years, I’ve developed a portion of package that helps maine way nan level of optimism and pessimism embedded successful banal price. I activity to situation nan assumptions embedded successful value by profitably exploiting nan disconnect betwixt what nan marketplace thinks and what is simply a apt outcome. I put successful those companies that person a greater than mean chance of giving america each a astonishment successful nan adjacent fewer months.