Third-party logistics (3PL) provider C.H. Robinson Worldwide (NASDAQ:CHRW) will unveil fourth-quarter 2018 earnings on Jan. 29 after the close of trading. The company's shares lost 5.6% last year, in line with the S&P 500's 6.2% decline. Can positive earnings propel C.H. Robinson past the index's performance in 2019?
Company management doesn't provide detailed quarterly earnings guidance for investors. Thus, it's important to understand key trends within the organization's performance to place earnings results in a proper context. Let's review four key items investors should watch when C.H. Robinson issues its fourth-quarter report next week.
1. A positive net revenue trend
In the first three reported quarters of 2018, C.H. Robinson was able to expand its year-over-year net revenue by 14.7% to $2 billion. Logistics companies define net revenue as total revenue less the cost of outsourced services. Shareholders will expect double-digit net revenue growth to continue in the fourth quarter, primarily due to the revenue stream discussed directly below.
2. Impact of the trucking market
C.H. Robinson's most significant revenue driver is its North American surface transportation (NAST) segment. The segment was responsible for roughly 68% of total company revenue of $12.5 billion in the first nine months of 2018. The business offers truckload, less-than-truckload (LTL), and intermodal shipping solutions to customers, and it benefited from tight capacity in the freight market for most of 2018.
NAST expanded year-over-year net revenue by nearly 19% in the first three quarters of 2018, to $1.3 billion. The business enjoyed pricing power on both contractual rates and spot (i.e., market) rates provided to customers, as a result of robust demand against a backdrop of tight freight supply.
Additionally, in the third quarter, costs excluding fuel rose at a slower rate than prices, leading to a 35% increase in segment operating income to $204.2 million. This beneficial equation may have continued in the fourth quarter. While a moderating economy may ease the upward trend in truck shipping prices in 2019, C.H. Robinson's management still expects mid- to high-single-digit pricing increase opportunities in this segment over the next few months.
In a possible harbinger of NAST's results, diversified freight conglomerate J.B. Hunt Transport Services reported a year-over-year increase of 18% in rates per loaded mile within its truckload segment in its own fourth-quarter 2018 results.
3. Stabilization in global forwarding's earnings
C.H. Robinson's second-largest segment, global forwarding, provides customs brokerage services, as well as global air and ocean freight logistics to a wide base of international customers. The segment has boosted head count in recent quarters in order to capture additional market share. As I discussed last quarter, increased personnel expense and variable compensation expense inflated operating expense by 12% over the prior year in Q3 2018, causing operating income in the segment to dive by 23.4% to $23.8 million.
During the quarter, average head count was 9% higher versus the prior comparable period, with 5 percentage points of this rise due to the company's September 2017 acquisition of Canadian freight forwarder and customs brokerage Milgram & Company.
Shareholders will expect Global Forwarding's operating income to stabilize this quarter, as its hiring spree has leveled off. Though the business has indeed staffed up to capture additional revenue, management pointed out last quarter that average head count decreased by 1 percentage point on a sequential basis.
4. Renewed profitability in Robinson fresh
C.H. Robinson's smallest segment, Robinson fresh, provides for the global transport of perishable items. Through the first half of 2018, the segment's net revenue dipped by 7% year over year to $109.4 million, and operating income plunged by 36% to $18.5 million, due to the leaner top line as well as rising expenses.
However, during the third quarter, Robinson Fresh took advantage of firmer truckload pricing, and improved net revenue by 11.2% over the prior year to $60.3 million.
More significantly, the business reduced average head count by nearly 6% and trimmed operating expense by 9%, resulting in a surprising 85% year-over-year leap in quarterly operating income to $21.4 million.
Segment operating margin of 3.78% slightly outperformed the 3.73% operating margin in global forwarding during the quarter. For reference, the NAST business tends to supply most of the company's profits: NAST notched an operating margin of nearly 6.9% during the same period.
Of course, a single quarter doesn't make a trend. However, the perishables business could help accelerate C.H. Robinson's total earnings if it transitions from being a profit drag to a profit generator. Thus, while relatively small, Robinson fresh can certainly contribute to C.H. Robinson shares' chances to outpace the broader market this year.