C.H. Robinson Worldwide Stock: A Sell Despite AI And Digital Technology (NASDAQ:CHRW)

As I cover airline, which are an extremely important part of the logistics chain, I am also expanding my coverage for logistics suppliers that offer logistics solutions by road, sea and rail. Recently, C.H. Robinson Worldwide (NASDAQ:CHRW) stock jumped 13% following its first quarter earnings report. In this report, I will be discussing the results and assess whether there is a compelling investment case for investors.

What Does C.H. Robinson Worldwide Do?

Since this is the first time I am covering C.H. Robinson Worldwide, I am starting by a short description of what the company does:

C.H. Robinson Worldwide is a top-tier non-asset-based third-party logistics provider with a significant focus on domestic freight brokerage (about 61% of net revenue), which reflects mostly truck brokerage but also rail intermodal. Additionally, the firm operates a large air and ocean forwarding division (27%), which has grown organically and via tuck-in acquisitions over the years. The remainder of revenue consists of the European truck-brokerage division, transportation management services, and a legacy produce-sourcing operation.

The company has three reporting segments:

• North American Surface transportation or NAST providing transportation services such as truckload, less than truckload or LTL, intermodal transport, and domestic air transport.
• Global Forwarding focusing on ocean freight services, air freight services and customs brokerage.
• Others which include Robinson Fresh providing supply chain solutions for perishables, TMC providing technology driven 4PL (fourth party logistics) solutions and Europe Surface Transport focusing on transportation services include truckload, less than truckload, bulk and foodtank, and intermodal.

C.H. Robinson Worldwide Earnings and Revenues Beat Expectations

Total revenues declined 4.3% to $4.4 billion but still beat analyst expectations, which stood at $4.28 billion. The reduction was driven by lower pricing on truck load services offset by higher ocean freight volumes. Sourcing revenues grew by 16.2% reflecting higher average pricing and an increase in volume with food service customers. While transportation revenues declined 5.7%, associated costs declined 5.7%. Cost for sourcing increased 17.5%, so that is not quite the cost growth we are looking for. Total costs decreased by 3.7%, which is also not quite favorable. Nevertheless, earnings of $0.78 per share beat analyst estimates by $0.15.

The NAST segment reported a 9.2% decline in revenues reflecting lower pricing, partially offset by a 1.5% increase in volumes. AGP or adjusted gross profit decreased nearly 10% in the truckload segment but increased 1.7% in the LTL segment for a 6.9% decline in adjusted gross profits. Overall, segment operating income decreased 18.7%.

Global Forwarding revenues increased 8.7% driven by higher pricing and higher volume, translating to 4.8% income growth to $31.5 million. The other segment saw revenue grow by 6.9% but due to softness in Other Surface Transportation, the total adjusted gross profit for the segment decreased 0.6%. So, overall the results reflect oversupply of capacity pressuring pricing but results came in significantly better than expected.

Leveraging Artificial Intelligence In The Logistics Industry

With the downturn in the industry, C.H. Robinson Worldwide is looking at optimizing its unit adjusted gross profits and while that itself is not surprising, I am more thrilled about the company’s pivot on its operating model to a lean technology model and the use of Generative AI to leverage their data and expertise for customers. This ultimately will decouple volume growth from headcount growth, giving the company a lower cost basis, allowing it to withstand future downturns. The company has already reduced its headcount 11.3% and the use of data and artificial intelligence could provide a valuable cost protection and yield management tool. Data is currently not fully leveraged in the logistics industry, while the industry does possess a lot of data to optimize its functioning. C.H. Robinson Worldwide is leveraging that data using GenAI as opposed to machine learning, which does not handle varying needs in freight solutions as effectively. The increasing adoption of digital solutions and adoption of AI should benefit C.H. Robinson Worldwide as a freight solutions provider.

Is C.H. Robinson Worldwide A Good Stock To Buy?

While I do love companies that provide tailored customer solutions and even more when they use data and artificial intelligence, CHRW has extremely little to offer in my view. While EBITDA is set to grow from $651.6 million in 2023 to $822.5 million by 2026 supported by sales growth, the expectation is that free cash flow will move in the opposite direction declining from around $650 million in 2023 to $489.1 million by 2026. Given those forward estimates in combination with the current balance sheet data and stock price, I don’t think CHRW is attractive by any means. The company trades ahead of its own median valuation levels with no upside until 2026 and even that upside is not compelling. Even more so, when considering that the stock trades significantly above its peer group. As a result, I am rating the stock a sell as any upside for the stock is uncompelling while I believe there may be more attractive ways to deploy cash.

Conclusion: C.H. Robinson Worldwide Not The Stock To Buy

When I looked at the business, I liked what I was seeing in terms of leveraging technology and AI for solutions for customers. However, a closer look at the business shows that driven by lower pricing on truckload and industry overcapacity, there is no attractive investment angle for C.H. Robinson Worldwide. So, while I do like the idea of technology infused truckload, LTL and freight brokerage services, there is no positive-inclined investment angle for the stock as free cash flow is expected to decrease, and the stock is already valued richly at present levels. In the future, my rating might change, as I do continue to see possibilities for volume growth to be decoupled from headcount growth when the freight recession ends.