Analysis: to IPO or not to IPO, that is the question for CMA CGM
What comes next for CMA CGM? I asked my sources, following a formidable trading update ...
DSV, CH Robinson and Expeditors all reported trading updates in the past couple of weeks, but enjoyed different fortunes – so what are the key takeaways for these three major players in the transport and logistics arena?
The answer hinges on the radically different corporate strategies that appear to be driving very different outcomes, with CH Robinson and Expeditors shareholders on one side and DSV investors on the other.
The financial and stock market performance of Danish forwarder DSV – whose stock rally continues despite obvious headwinds in the broader freight forwarding industry – is a benchmark for most.
The purchase of US-based UTi Worldwide is driving growth, while higher core margins were back on the agenda in the first quarter after a year of transition.
Air and sea, road, and solutions activities were all on their way up, its quarterly results showed, with significant growth being recorded in its core air and sea forwarding unit, which represents almost 50% of group revenue.
In particular, gross profit was Dkr2,11bn for the three months against Dkr1,88bn for the same period of 2016. Adjusted for exchange rate fluctuations, growth for the period was 11.6%, DSV added, noting that the increase was partly attributable to the acquisition of UTi.
“DSV Air & Sea delivered a solid performance across all regions, with Americas and APAC reporting the highest growth rates for the quarter.”
Whereas, in the Americas and APAC, neither CH Robison and Expeditors are having a blast.
As a reminder, UTi was a distressed asset when acquired by DSV at the end of 2015, but capable managers have turned it around, allowing the Danish powerhouse to enlarge its asset base on the other side of the Atlantic, where other transport and logistics companies chasing organic growth have struggled to deliver value to their shareholders.
Robinson under pressure
Take CH Robinson, for example. Its core truckload operations and intermodal activities continue to be under pressure; its US-centric portfolio is giving it a headache, as first-quarter figures proved.
Net earnings per share held up, helped by a lower share count in the wake of buybacks, but depreciation and amortisation and headcount costs rose, as the table below shows, while operating cash flows and cash balances were down, both year-on-year and quarter-on-quarter.
The company acknowledged that changing market conditions impacted its financials, as rising volumes in nearly all of its service lines were offset by diminished pricing power, which inevitably weighed on net revenue margins.
In short, CH Robinson needs options and to diversify away from its core US market, yet that’s easier said than done at a time when expansion beyond domestic barriers could draw the attention of Washington – for all the wrong reasons, if I may say.
Still, the situation has been difficult for some time, at least operationally. As it points out, “truckload margin compression in our North American surface transportation business was a challenge to our earnings per share during the second half of the year”.
While it delivered a solid financial performance last year, its “enterprise performance was below our target performance goals”, and that resulted in below-target incentive payouts “under our annual cash incentive plan for four of our named executive officers (NEOs), and lower vesting in our performance-based equity awards for all NEOs”.
In this context, it is easy to argue that Europe remains an opportunity too obvious to pass up, given the highly fragmented nature of the market there, as well as the likelihood that European expansion could grant it a hedge against currency headwinds, should the US dollar continue to strengthen through to 2018.
Costs rising for Expeditors
Finally, Expeditors. Its balance sheet is solid and quarterly swings should not preoccupy investors, but look at its net income and cash flow profile in the three months ended 31 March.
Revenue trends were not problematic, but operating costs rose as players competed for a smaller slice of the same market, where growth is nowhere in sight; and must preserve competitiveness, hence diluting their underlying profitability at operating level.
Most of the drop in operating income, down about 3% year-on-year, has to be attributed to Expeditors’ performance in Asia, which is key to value creation given the size and returns associated to its operations in that part of the world.
And the winner is…
DSV is on a roll on the stock exchange, while the shares of CH Robinson and Expeditors have fallen since their quarterly results were announced. But both still trade where they changed hands a while ago – although, admittedly, Expeditors has been more resilient.
So, here is DSV’s stock performance….
… while the in following two charts you’ll see how the shares of CH Robinson and Expeditors have fared in recent times.
Can you tell the difference?
Of course, these three companies cater to different verticals and end markets, and as such their underlying operations are not strictly comparable, but one key takeaway is that inorganic growth measures (for which, primarily read ‘acquisitions’) ought to be combined with organic growth initiatives as part of broader corporate strategy that, at this point in the business cycle, requires a bit of creativity in order to please existing shareholders and new investors alike.