Tags

, , , , , ,

Regular readers will notice that this is the first post in quite some time.  Thank you for all your emails asking where I had disappeared to.  I will now return to writing again regularly.  I hope you enjoy it.  As always, if you have any questions or comments, I can be reached at punchcardblog@gmail.com.

“Risk estimation. . .will by necessity be subjective, imprecise, and more qualitative than quantitative (even if it’s expressed in numbers).”

  • Howard Marks, Risk Revisited

In 2007, Bradley Jacobs looked about for his next mountain to climb.  A serial entrepreneur, Jacobs had compiled an enviable winning streak.  He built and ran two public companies, United Rentals Inc., which he co-founded in 1997, and United Waste Systems, Inc., founded in 1989.  Prior to that, he had founded and run two other successful, private companies.  As he searched about for his next triumph, he focused on the transportation and logistics industry, and, specifically, the brokerage space.  Ultimately, Jacobs acquired XPO Logistics, a truck brokerage company.

What attracted a savvy businessman like Jacobs to transportation brokerage?[1]:

  • Its large. The total addressable market is more than $3 billion worldwide.
  • Its fragmented. Having built rollups before, Jacobs saw the opportunity to benefit from consolidation.
  • Its non-asset based. As a result, the businesses throw off loads of free cash flow and need little to no debt.
  • It produces high returns on invested capital.
  • It has room for growth. Just 15% of US shipping goes through a broker.
  • It offers an attractive economic proposition for customers. There are large incentives to outsource freight arrangements.

Regular readers will note that this list includes business characteristics that we regularly look for as well.  As a result, this industry is worth a closer look.

U.S. Trucking Industry Ecosystem

Trucking is an enormous sector of the economy.  It generated $681.7 billion of revenue in 2013.[2]   The trucking industry employed 7 million people in 2012.[3]  In fact, 1 out of every 16 people in the private sector in the US are connected to the trucking industry.[4]

The industry is also highly fragmented and terribly inefficient.  In 2013, there were 465,967 for-hire carriers in the US.[5]  Of these carriers, 90.6% operate 6 or fewer trucks.  On the other side, there are millions of shippers in the US.  This fragmentation creates an enormous coordination challenge.  Given the multitude of parties, how do you connect the right load with the right equipment at the right place and right time?

Figure 1

Ecosystem

Just how inefficient is it?  So-called “deadhead miles,” the miles a truck drives with no load, accounted for approximately 10% of the 5 major truck load carriers in 2013.[6]  By one calculation eliminating deadhead miles altogether would cut out approximately 64 billion (yes, that’s billion with a B) miles of driving and yield saving of $60 billion.  One other indication of inefficiency is the number of loads carriers turn down.  That is, a customer calls them up with a shipping request and the carrier simply turns it down because they lack the capacity or for some other reason.  In the first quarter of this year, trucking company US Xpress turned down 1,200 loads per day.[7]

The matchmaking mechanisms that have evolved over time are fairly straightforward.  Shippers can either deal direct with carriers or go through intermediaries.  Intermediaries don’t own the trucks, ships or planes.  They manage the logistics of how freight moves from one point to another by matching shippers with carriers.  As with the rest of this fragmented industry, there are lots of intermediaries.  There are over 20,000 registered freight broker but only 40 earn more than $20M in net revenue.[8]

Intermediaries range from small domestic providers with a focus on one or 2 core service offerings to large global entities with complete service offerings.  The intermediaries with the broadest range of services are known as “third party logistics specialists” or “3PLs.”  The largest 3PLs have the ability to act as an outsourced transportation department for S&P 500 companies.

Intermediaries extract much of the value in the trucking value chain.  Intermediaries charge roughly 15% of the cost of shipping (and as much as 30% for critical time-sensitive loads in key lanes, particularly smaller loads) for matchmaking services, more than covering the high costs of their labor-intensive operations.  Truck fleet operators often see 3-4% EBIT margins in aggregate, while non-asset based brokers enjoy 6-8% EBIT margins in aggregate.   See Figure 2.

Figure 2

2 Op Margin

For our purposes, it is best to segment the trucking industry into (1) non-asset based, (2) asset-light and (3) asset based.  These segments are based on whether the company owns a fleet of trucks, act as a mere intermediary or some combination of the two.  Non-asset-based providers are mere brokers as described above. The asset-light businesses combine brokerage activities with actually carrying goods themselves.  These companies either lease or own a small percentage of capacity utilized in transportation moves. Finally, the asset based companies own fleets of trucks and must maintain dedicated capacity.

Recent years have seen a blending of the two extremes.  See Figure 3.

Figure 3

3 3PL

The non-asset based freight forwarding model has several advantages over the asset based model.  First and foremost, the non-asset based companies have much lower capital expenditure requirements than their competitors with a truck fleet to maintain.  As a result, they generate much higher levels of free cash flow.  Second, they have a much higher level of variable costs than fixed costs.  This is a two-edged sword to some extent.  In bad times, it’s terrific not to have the fixed costs burdening your income statement.  In good times, though, they do not get the economies of scale benefit that the asset-based companies do.  Overall though, the non-asset based companies consistently generate both strong earnings and cash flows in virtually all economic cycles.  Third, the minimal amount of capital needed to run the business drives very high returns of equity for the non-asset based companies.

The intermediary segment of the ecosystem has grown very quickly and continues to have room for more growth.  (See Figure 4.)  Broker penetration of domestic trucking services is just 15%.[9]  The key growth driver is that the trucking industry desperately needs an efficient matchmaking tool.  It makes economic sense for carriers to find loads through brokers instead of carrying the costs of an internal sales team. And shippers – including those with direct carrier relationships – need intermediaries as a source of critical capacity when trucks are hard to find.

Other industry drivers include:

  • Growth in e-commerce retailing
  • Conversion from over-the-road to intermodal rail
  • Near-shoring of manufacturing in Mexico
  • Just-in-time lean production
  • Driver shortage[10]
  • Automation of the transportation logistics process

Figure 4

4 3PL Sales

Because of our emphasis on moats, we have decided to focus on CH Robinson (“CHRW”) as it has the widest moat in this industry  based on return on invested capital (“ROIC”) and size of network (See Figure 5).  The moat is described in detail below.  CHRW is not cheap by normal valuation metrics.  CHRW does not appear on price to sale, price to earnings, price to book screens.  Instead, we think there is a reason the stock might be misunderstood or mispriced.  That is, there is a reason investor have not correctly figured out what’s going on.  At work is common misunderstanding:  confusing secular and cyclical forces.  We predict by extrapolation.  As a result, we feel that whatever conditions are currently observed will prevail forever.[11]

Figure 5

5 ROIC

Business Segments

CHRW operates two distinct business segments:

  • Transportation and Logistics Services – One of the largest third-party logistics providers in the world. The company sits in between customers with products to ship and carriers with capacity to provide.  Transportation further breaks down into the following lines of business:
    1. Truckload
    2. Less Than Truckload (LTL)
    3. Intermodal
    4. Ocean
    5. Air
    6. Customs
    7. Other
  • Sourcing – The original line of business when CHRW was founded in 1905. CHRW sources produce and other perishable commodities for grocery retailers and restaurants, produce wholesalers, and food service distributors

Transportation represented 93% of total net revenue in 2013 and Truckload and LTL represented 76% of the Transportation segment.  As a result, this write-up will focus almost exclusively on the Truckload and LTL businesses.

Business Model & Moat

When a company earns abnormal returns like CHRW, we want to understand what is driving it, why it exists and whether it’s sustainable.

CHRW’s basic business is to link truck owners with customers with good to ship.  In this way, CHRW acts like a middleman linking two sides a market just as Uber links cars and passengers, Google links searchers and advertisers, or eBay links sellers and bidders.  This business model is known as a platform or two-sided market (See Figure 6).[12]

Figure 6

6 2 sided

The key to generating out-sized returns in this business is getting to critical mass.  More precisely, how does the platform simultaneously attract users on both sides of the platform?  Companies in these markets adopt different strategies to overcome this problem.  Google, for example, gives away the search service to attract more advertising money.  Singles bars will allow women in for free to attract more men.  Microsoft sells Xbox consoles at a loss in order to attract more independent game publishers who pay Microsoft a royalty. Once this initial hurdle is overcome, the platform company is on the path to sustainable growth.

In the truck brokerage game, the dilemma is to reach a critical density of engaged shippers and carriers.  But because the industry is SO incredibly fragmented, it is very difficult to accomplish this.  It is this dynamic that forms the basis of CHRW’s moat.  But once this initial hurdle is overcome, the platform company has built a significant barrier to entry?

Why?  Reaching a critical mass of shippers and carriers creates a self-reinforcing dynamic.  Customers want to be where the most carriers are and carriers want to be where the most shippers are.  CHRW is a liquidity provider and no one can match their liquidity.  This is attractive to both side of the market because of the inefficiency in the industry and the difficulty buyers and sellers have in finding counterparties.

The benefits of scale to CHRW  is similar to the phenomenon seen in stock exchanges whereby liquidity begets liquidity.  By looking at the dynamics of liquidity creation in the heavily studied US equities market, we can better understand the nature of CHRW’s moat.  What leads willing counterparties to meet in a marketplace and be turned into trades?  And, on the other hand, what is it that can prevent buyers and sellers from coming together and meeting each other when they all want to trade?

Markets tend to operate in rough equilibrium between buyers and sellers.  That is, markets are generally two-sided.  A buyers only or sellers only market is one-sided. The arrival of more buyers (or sellers) attracts the arrival of more sellers (or buyers).  Trading begets trading and liquidity begets liquidity

Liquidity builds on itself because it has three key features that attract market participants:  immediacy, depth and the size of bid-ask spreads.  All 3 of these characteristics are evident in the truck brokerage market.  Immediacy is of obvious importance to shippers and carriers as it is to stock traders.  Depth is similarly important.  In the truck brokerage industry depth is referred to as “lane density.”  The bid-ask spread is not directly relevant but is roughly equivalent to a balance between supply and demand.

The benefits of liquidity underpin CHRW’s moat and make it difficult for competitors to compete.  The benefits of scale in this business can be seen in Figure 7 (courtesy of Monte Sol Capital).

Figure 7

Scale

Source:  Monte Sol Capital

Is the Moat Expanding or Contracting?

Two-sided markets demonstrate a particular propensity for tipping to winner-take-all situations.  After all, it is in the interest of all participants to use just one product or service.  Big city newspapers in the pre-Internet era are a classic example of this dynamic.    On one side readers are attracted to the newspaper with the most advertising, not because they love ads but because the ad revenue gives the company more money to spend on content.  Similarly, advertisers are attracted to the newspaper with the most readers.  This dynamic is why in the pre-Internet world, cities were dominated by a single, highly profitable newspaper.  A similar dynamic causes consolidation of stock markets.  “We have seen that, over time, the equity markets have always tended to consolidate.  Consolidation and two-sidedness are natural processes for an equity market.  They are the main dynamics that underlie liquidity creation.”[13]  Why hasn’t North American trucking experience a similar consolidation process and what are the implications for CHRW’s moat?

There are three primary reasons for the lack of consolidation:

  1. Low capital requirements to start a 3PL business. A broker can initiate work with just a computer and a telephone.  There will probably always be numerous small-scale participants in this business due to the low barriers to entry and the high returns on capital.
  2. In the 3PL business, unlike say search engines or operating systems, companies must face the multi-homing problem.  That is, shippers are able to use more than one transportation provider at a time.  I see no reason to use Bing or any other Google competitor.  But when searching for the best shipping price, I use more than one source because each source covers such a small percentage of the shipping universe.
  3. Switching costs. Once a shipper becomes accustomed to using a certain 3PL and their processes become integrated, switching providers can be quite costly.  3PLs augment this issue by adding special features and specializing in unique needs or niches.

The incentive for users to have a single 3PL is less than in the case of, say, eBay, another company with a strong two-sided market.  A single object can be auctioned in one place, while using more than one 3PL is not all that complicated.  Consequently, the profitability of these companies will be different, since the width of the moat is different.  Yet, CHRW’s number of shipments has grown faster over the past 10 years than eBay’s gross merchandise value – roughly comparable metrics for measuring transaction volume growth.

Nevertheless, CHRW continues to widen their moat by expanding their network of carriers and by opening more offices.  CHRW has 1.5 times the carrier network of its next largest non-asset based competitor, LSTR, and 50% more revenue.  This gap has steadily expanded over time.  See Figure 8.

Figure 8, Growth in Carrier Network, CHRW v. LSTR, 2004-2103

7 network

Competition

As we would expect, CHRW’s high returns on investment have attracted competitors for many years.

Roll Ups

Currently, the most aggressive competitors are Reliant Logistics and XPO – both of whom are engaged in roll up strategies.

A roll up is a technique used by investors where multiple small companies in the same market are acquired and merged. The principal aim of a roll up is to reduce costs through supply side or demand side economies of scale. Roll ups may also have the effect of rationalizing competition in crowded and fragmented markets, where there are often many small participants but room for only a few to succeed.  On the surface, a roll up strategy is highly attractive.  The concept makes intuitive sense, the ensuing revenue growth rate is unbelievable, and the problems remain obscured.

Due to its fragmentation and high number of small competitors, the truck brokerage industry certainly seems ripe for a roll up.  Further, many of the moms and pops are ready to sell due to structural barriers to growth.  Specifically, brokerages are required to pay carriers before they receive payment from shippers.  Smaller brokers cannot afford to carry sufficient working capital to cover this cash flow and run into obstacles borrowing this cash from banks.  As a result, they are prime acquisition targets.  The bull case is laid out very well here and here.

Nevertheless, roll ups are not a guaranteed path to success.  According to one source, “more than two-thirds of rollups fail to create any value for investors.”[14]  The key issue is that rollups have to maintain their aggressive pace of acquisitions or growth ebbs, investors disappear, and the financing for the rollup goes with them.  The major risks to a rollup strategy:

  1. Integration risk: It is difficult to integrate the different businesses acquired as they all have different systems (including IT, accounting and business systems), management styles and cultures. The more companies acquired the greater the integration risk.  Will the different businesses fit together in a coherent strategy?
  2. An unsustainably fast rate of acquisition. The market value of the consolidator becomes dependent on an acquisition-related growth.  This particularly true in slow growth industry like trucking which is growing at the rate of GDP.
  3. The price of acquisitions rise over time, as your rollup intentions become clear.
  4. Reliance on capital markets. ny strategy that requires access to capital to succeed can be shaky, because capital is likely to not be available during times of duress. If you’re financing with debt, just how big a hit to your business can you withstand? What if you take a hit to cash flow for a period of years? If you’re buying with stock, what do you do if your stock price falls by 50%?
  5. Increased costs: sometimes the cost synergies don’t outweigh the additional costs of a head office (salaries and lease expenses);
  6. Non-alignment of incentives: once the founders have received a large cash payout as part of the rollup they lose focus and become distracted by their new-found wealth (decisions about which super fund to invest in and what holiday house to buy) rather than driving their business forward. In some recent deals, there are numerous cases where the founder actually leaves the group to start a new competing business
  7. Cultural issues: often the bolt-ons are run very informally with little or no corporate governance mechanisms in place and with limited finance/reporting systems. Under the new regime they will inevitably be forced to deal with a more formalized culture with far stricter reporting requirements and governance

In fact, rollups have failed before in the logistics industry.[15]

The Innovator’s Dilemma

The innovator’s dilemma is a term coined by Clayton Christensen to describe the difficult position successful companies find themselves in when competitors offer lower quality, less expensive versions of their products.  Success companies focus on adding more bells and whistles to their products to serve the needs of their most valuable customers.  They are reluctant to offer lower-priced more basic versions because of the risk that they will cannibalize existing sales.  This leaves them exposed to “ “disruptive innovation”: the selling of a cheaper, poorer-quality product that initially reaches less profitable customers but eventually takes over and devours an entire industry.[16]  A classic example is IBM focusing on mainframes to corporations but missing the untapped market in personal computers.

I am concerned that CHRW is vulnerable to low-end competition because of its focus on providing a full spectrum of logistics services to large multinational when lots of shippers have no need for anything so complex.  One example is Freightquote.  Freightquote developed a patented-technology platform to enable shippers to find competitive rates that can be compared for their freight shipments, similar to that which travel websites provide.  With revenue over $600 million, Freightquote has been at this since 1998 and their revenue is just 5% of CHRW’s.  Another example is Open Mile.  Another example is Cargomatic which matches truckers with available space on their trucks with shippers.  Cargomatic is also able to provide real-time updates each step of the way.  These competitors are nimble and highly automated without the personnel cost that CHRW incurs.

There are also load boards.   An easy way to think of a load board is as a web-based bulletin board service for the transportation industry. Shippers, carriers and their intermediaries use load boards to advertise their needs, whether its freight to be shipped or a truck in need of a load. This seems pretty crude by current standards.

The trucking industry has proven to be very hard to disrupt.

Margin Compression

Purchased transportation is the largest component of their total operating costs as a percentage of gross revenue.  CHRW’s Transportation net revenue margin has bounced around over the past 10 year with a peak of 20.21% and a trough of 15.34%.  See Figure 9.  The 10-year average is 16.95%.  But, the margin has dropped each of the past 5 years and 2013 was the lowest in at least a decade.

Figure 9

8 Net Rev

What’s driving this margin compression?  Soft demand for shipping services combined with tight capacity at carriers is making it difficult for CHRW to pass along higher costs to customers.  At the same time, competition is heating up from the numerous transportation companies that want to expand their asset-light 3PL logistics business.  Stable rate flows have created less demand for spot market freight from which brokers earn higher margins.

Further pricing dynamics in the industry make it difficult to pass along cost increases to customers.  Shipping is sold on a long-term contract basis and capacity is acquired on a spot market basis.  When carrier pricing drops, CHRW immediately reaps the rewards.  See 2009 for example.  However, this is a double-edged sword.  When carrier pricing increases, they can’t pass along the increase immediately and margins compress despite revenue increases.  In sum, the cost of capacity increases faster than CHRW’s ability to pass pricing to shippers.

Thus, they benefit from revenue growth and operating expense leverage in a strong economy/tight capacity environment and they benefit from purchasing/gross margin leverage in a weak economy/loose capacity environment.

Investors seem to be projecting these reduced margins far into the future.  Is there a reason to believe this margin compression is the new normal or are we suffering from recency bias?

The case for secular change in the 3PL industry is as follows: New entrants are furiously hiring, buying up small brokerage firms, and accepting tighter spreads as they attempt to cobble together networks that can compete with CHRW.  Further, advancements in technology have increased transparency in pricing.  These changes have rendered permanent change in the competitive landscape.

The counter-argument is that we have witnessed unprecedented calmness in the trucking industry in the years since 2009.  The calmness is caused by prolonged balance between supply (truck capacity) and demand (consumer spending).  Subdued consumer spending has allowed shippers to rely more on low margin, scheduled shipments and fewer high margin rush shipments.  On the other side, carriers are reluctant to spend to increase capacity – either on increased wages for truckers or new trucks.  As a result, as demand is slowly increasing, truck utilization is rising and prices are increasing.  This causes broker margins to compress.

This state of affairs seems unlikely to continue much longer.  “If something cannot go on forever, it will stop.”[17]  This supply/demand balance is the product of randomness and the equivalent of flipping a quarter and having it land on tails 25 times in a row.  I can’t tell you with any precision when the streak will end, but it will end.  “(P)redictions of important divergences from trends and norms can’t be made with anything approaching the accuracy required for them to be helpful.”  Simply stated, current conditions are a matter of market cycle and not a sudden change in the competitive landscape.  Predicting macro trends like this is a fool’s errand, but either demand or supply will change, either up or down, and CHRW stands to benefit.

Why?  CHRW outperforms anytime the market is out of equilibrium – boom or recession – and underperform in the economic trough, where supply and demand for transportation reach equilibrium.

A third scenario has earnings growth accelerating due to tightening of truck capacity.  When capacity is tightening, CHRW’s margins tend to get contracted but sales volume grows.  The drop in capacity is masked by the recession and slow growth.

Are We On The Verge Of A Truck Capacity Crunch?

A truck “capacity crunch” occurs when there is less trucking capacity available in the country than freight which needs to be shipped.  Under the law of supply and demand, a drop in a capacity below equilibrium will drive an increase in truck shipping prices as shippers compete for now rare truck space.  In other words, demand goes up, supply becomes tighter and prices and margins go up.  As a result, it is critical to understand this issue when evaluating the economics of the industry.

There is a lively ongoing online debate in the transportation sub-sector of the Web (yes, there is such a thing) as to whether the trucking industry is on the verge of a capacity crunch.  Proponents point to a perfect storm of a driver shortage, new regulations putting companies out of business, and a lack of equipment investment.  Unfortunately, these same proponents have been predicting a capacity crunch for 8 years with no sign of prices rising yet.[18]  Further, many of the proponents have a vested interest in promoting fear of a capacity crunch – either because they are consultants who want to advise shippers on dealing with the crunch or they are stock analysts who want to boost up the stock price of carriers.  On balance, what does the evidence tell us?

  • Driver Shortage – The biggest factor drivers point to is a shortage of qualified drivers. Across the country, there are about 30,000 unfilled truck driving jobs according to a 2012 ATA study.
  • High Bankruptcy Rate – In 2012 alone, over 51,000 trucking companies, most of them sole proprietorships, went out of business and 400,000 trucks were taken off the road.
  • Reducing Equipment Investment – During the economic slowdown, many carriers held on to tractors and trailers longer than they normally would because they could not afford to replace them. Carriers are operating with 8% fewer trucks now than in December 2007.  Now that some are in a position to replace older equipment, a sudden surge in demand for new tractors and trailers has created added problems.
  • Government Regulation – The Compliance, Safety, and Accountability (CSA) clearinghouse went into effect in December 2010. It is designed to make the roads safer by measuring truck company performance and the performance of individual drivers.  These regulations have shrunk the potential pool of new recruits by making it harder to hire potentially unsafe drivers.  Additionally, new hours of service rules are now in effect.

Pardon my ignorance, but isn’t there a simple solution to this problem?  In a time of high unemployment, couldn’t trucking companies just pay a bit more?  When capacity really tightens and prices go up, trucking companies will open their wallets and pay more for truckers and buy more trucks.  If they don’t, new entrants will certainly take advantage of the situation.[19]

What Is The Impact on Carriers and 3PLs?

If we assume that there is in fact a capacity crunch who benefits more, carriers or 3PLs?

If there is in fact a capacity crunch, I am not sure that CHRW’s business will suffer.  To be sure, pricing power will continue to accrue to the carriers.  But, when capacity gets tight enough, CHRW’s volume should increase as shippers contact brokers for help in locating ever scarcer capacity.  Thus, in this scenario, revenue will increase but margins will compress.  As can be seen from the historical results, CHRW does well in times of both loose capacity and tight capacity.

Valuation

I’ve really struggled with this section.  Generally, the stocks I look at, including CHRW, have a low risk premium and therefore appear to be more expensive.  That is, high quality companies pose less fundamental risk and investors require less of a risk premium.   This leads to a fundamental dilemma: Do we focus on high quality companies and pay the higher prices they command?  After all, the future is unknowable.  Are we willing to pay a premium to diminish the probability that the company’s fundamental business will dramatically deteriorate?  Or, are we simply trading fundamental risk for valuation risk?  As Howard Marks wrote, “Efforts to reduce fundamental risk by buying higher-quality assets often increase valuation risk, given that higher-quality assets often sell at elevated valuation metrics.”

As a believer in the virtues of a margin of safety, it’s not easy to swallow a forward P/E of 21.  Yet, there is some evidence that quality is consistently mispriced by the market.[20]  After all, Buffett bought KO at a forward P/E of 15 and MCO at a forward P/E of 21.  Both worked out well.

To better understand the current stock market valuation, I performed a reverse DCF calculation.[21] As can be seen in Figure 6 below, in calculating the value of CHRW, Wall Street is extrapolating current results far in to the future.  They are assuming that the future will look a lot like the recent past.  The analyst estimates for the next couple of years look a lot like the trailing 12 months and very little like CHRW’s prior 10 years.

Figure 10

9 Valuation

The model then has the company entering a period of decline in year 6 and into the future.  In short, there is an expectation for value creation in the near term (albeit far below historical results), followed by a period of declining cash flow.

For the reasons laid out above, I do not think CHRW’s moat is threatened and I do not think the company’s best days are behind them.  In fact, I believe that the current period is a mere anomaly.  If we assume a return to historical revenue growth, margins and cash generation, the company becomes much more attractive.

Conclusion

In some ways paying a decent price for a good company is harder to do than buying cigar butts.  You have less room for error. If you are going to pay up, you better understand the business and know why it should be worth more.

Many value investors are willing to pay nothing for growth.  If you pay a premium for future growth rates, you must determine the competitive advantages and barriers to entry that will protect future growth.  Here, I think we have done that.

Charlie Munger once said: “If a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”  CHRW has averaged ROE of 31% over the past 10 years.

[1] XPO Logistics Investor Presentation Script

[2] American Trucking Association, “American Trucking Trends 2014”

[3] Ibid.

[4] Ibid.

[5] FMCSA

[6] AT Kearney report cited in “Multi-Modal Management:  It’s a Group Effort,” Supply & Demand Chain Executive.

[7] Journal of Commerce, “Capacity Squeeze May Spark Supply Chain Changes,” April 29, 2014.

[8] Testimony of Anne S. Frerro, Administrator, FMCSA, September 20, 2012.

[9] XPO Logistics Investor Presentation, February 12, 2013.

[10] I am skeptical that this is much of a factor in the long-term as discussed below.

[11] This is more technically known as “recency bias.”  See http://www.skepdic.com/recencybias.html.

[12] CHRW’s moat is often characterized as being based on “network effects.”  I think this is an imprecise description and leads to flawed analyses.

[13] “Liquidity Begets Liquidity:  Implications for a Dark Pool Environment,” Federal Reserve Bank of New York, October 21, 2008.

[14] Billion Dollar Lessons, p. 61

[15] One cautionary tale is the story of WorldPoint Logistics.  Founded in 1998 as a consolidator in the asset-light logistics industry, WorldPoint undertook five acquisitions in its first year.  One would prove to be its undoing.  WorldPoint made the mistake of acquiring Expedited Delivery, an asset intensive trucking company with 400 tracks, 700 trailers and 800 employees.  The division bled money and was sold in 2001.  But, it was too late to save WorldPoint which declared bankruptcy in 2002.  According to the Puget Sound Business Journal, the WorldPoint CEO indicated “that attempting to roll up into one organization a group of disparate companies, with varied cultures and executive personalities, has been more challenging that he anticipated.”  A second tale is Fritz Cos.  During the late 1990s , Fritz went on an acquisition spree that expanded gross revenue from $40 million to $1.6 billion.  Fritz too had trouble digesting a single acquisition, Intertrans.  Fritz was forced to sell itself to UPS in 2001.

[16] http://www.newyorker.com/magazine/2014/06/23/the-disruption-machine

[17]  Herbert Stein, What I Think: Essays on Economics, Politics, & Life

[18] See NY Times, “Short on Drivers, Truckers Offer Perks,” February 26, 2006.

[19] For a better articulation of this argument, see “The Trucking Industry Needs More Drivers. Maybe It Needs to Pay More.”

[20] Bakshi, Sanjay, “What Happens When You Don’t Buy Quality?; And What Happens When You Do?; Joyce, Chuck & Mayer, Kimball, “Profits for the Long Run:  Affirming the Case for Quality

[21] My DCF calculation is available here.  I welcome input.