In May 2024, I initiated coverage for C.H. Robinson Worldwide (NASDAQ:CHRW) with a sell rating. It doesn’t happen often that I issue sell ratings, and it most definitely does not happen that the call is wrong. This time, however, I was wrong; CHRW stock took off, gaining 29% compared to a 5% gain for the S&P 500. In this report, I will be discussing the most recent earnings and evaluate my price target and rating for the stock.
C.H. Robinson Worldwide Earnings and Revenues Beat Expectations
Year-on-year, total revenues increased 1.4% to $4.5 billion, with a 0.9% increase in Transportation revenues and a 7.2% increase in sourcing revenues. Revenues declined significantly, but analysts had already anticipated a decline. However, the reported revenues were $40.6 million worse than what analysts had expected.
Total direct operating expenses grew 1.1 percent to $3.81 billion but still pointed at margin expansion. Adjusted profit, which adds back costs related to internally developed software amortization, increased 3.3% to 687.4 million. Overall, core earnings of $1.15 per share beat analyst expectations by $0.19.
Since the first quarter, C.H. Robinson Worldwide has adopted a new operating model where it infuses automation and artificial intelligence in its systems to provide the best solutions for customers and attempt to decouple volume growth from headcount growth. Furthermore, the company is aiming to win market share but no longer at all costs as it attempts to win profitable business. We saw something similar with DSV A/S, which I recently covered. DSV A/S focused less on market share growth and more on profitable growth. C.H. Robinson Worldwide did the same, but also managed to continue growing its market share. During the quarter, truck load volumes were up 1.5% and price per mile declined 2%, but costs per mile declined 3.5% which points to gross margin expansion and the company saw its adjusted gross profit or AGP jump nearly 8%. So, the optimization efforts are paying off.
Global forwarding AGP margin, however, dropped from 23% to 20%, but AGP still grew from $179.2 million to $184.1 million. The continued normalization in air freight rates and demand caused an 8.9% reduction in Air AGP while Ocean AGP grew 8.6% to $116.6 million due to the situation in the Red-Sea which drives shortages of capacity and port congestion.
Robinson Fresh, focused on supply chain solutions for perishables, saw AGP increase 5.2% as it provided more solutions for customers. Managed services AGP were stable, while Other Surface Transportation AGP declined 20.3% to $15.1 million, reflecting a 23.3% decrease in European truckload AGP. So, what we see is that the North American Surface Transportation segment is distinctly different from the European counterpart. Not just by side, but also by direction of the AGP. Whereas AGP increased 4.8% with a 100bps margin expansion for the North American business, it was down for the European Surface Transportation segment.
So, overall results are down with continued challenges in the marketplace, but the approach C.H. Robinson Worldwide is executing is allowing the company to increase adjusted gross profit by 3.3% year-on-year on a 1.4% increase in revenues.
Is C.H. Robinson Worldwide Stock Now A Buy?
I added the forward projections for C.H. Robinson Worldwide to the evoX Stock Screener developed by The Aerospace Forum and driven by a 9% increase in EBITDA between 2024 and 2026 compared to my previous estimate and the ability of the stock to outperform the market, the price target for 2024 has been lifted from $66.69 to $79.36 and the target for 2025 has been lifted from $76.94 to $86.80. So, there is a significant bump to the targets, which more or less shows that the price targets driven by fundamentals are pulled one year forward. However, we also do note the stock is still overvalued against its median valuation as well as peers. So, while we are upgrading the stock from sell to hold, I cannot conclude any differently that the stock remains overpriced at current levels.
We do see positives in the form of the new operating model with a high degree of automation and artificial intelligence applications, but I strongly believe that we need significantly more robust growth in EBITDA to justify the price levels we are currently seeing.
Conclusion: C.H. Robinson Worldwide Stock Upgraded To Hold
I most definitely like that the company is leveraging technology and AI solutions for customers and focuses on profitable growth instead of expanding market share without adding to the profits. That strategy is paying off rather well as we saw in the second quarter with adjusted gross margins expanding. However, I do believe that CHRW stock is valued extremely richly at current price levels and while it might not be a sell, there also is no strong fundamentally driven buy case either. Therefore, I am upgrading the stock to hold.
The stock is only a buy if AI and decoupling effects are significantly higher than what is currently anticipated. So, if you believe in the enormous application strength of AI, then this could be a speculative buy.
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