Shares of C.H. Robinson Worldwide (CHRW 0.53%) traded down 10% on Wednesday following the company's earnings report. The company's earnings-per-share number actually came in ahead of expectations, but operating income was light, and the next few quarters are shaping up to be a challenge for the transportation and logistics company.
C.H. Robinson, after markets closed Tuesday, reported third-quarter earnings of $1 per share on revenue of $4.2 billion, besting Wall Street expectations for $0.97 per share in earnings on sales of $3.88 billion. Total revenue was up 9.6% year over year, driven by strong pricing power and higher volumes, but operating income of $168 million fell short of analysts' $179 million target.
The per-share-earnings number beat consensus in part due to a lower-than-expected tax rate. C.H. Robinson's operating results were hit by rising costs and lower margins in its truckload services, with overall operating margin falling 310 basis points in the quarter to 28.6%.
"We were able to deliver solid performance across our diversified business portfolio and improve our results as the quarter progressed due to the efforts of our C.H. Robinson team members around the world," CEO Bob Biesterfeld said in a statement. "Against a challenging backdrop, we delivered on our contractual commitments with acceptance rates that were above the industry average, while also serving customers' needs in the spot market."
Biesterfeld said the company believes the strengthening freight cycle fueling higher demand will continue into 2021. We've already heard talk that shipping giants FedEx and United Parcel Service are booked for the holiday season, and C.H. Robinson too is expecting a busy last few months of 2020.
"Freight markets are continuing to tighten in the fourth quarter due to higher demand as we enter the holiday season and lower availability of carrier capacity," Biesterfeld said.
The issue for C.H. Robinson, which is primarily a brokerage connecting shippers to transport providers, is that in times like this, large customers tend to bypass the middleman and deal directly with transportation companies in order to lock in capacity.
C.H. Robinson, trading at an enterprise value (EV) 16.5 times earnings before interest, taxes, depreciation, and amortization (EBITDA), is priced at a premium compared to rivals, including XPO Logistics (NYSE: XPO) and its 9.9 times EV/EBITDA ratio. When a stock is priced at a premium, the market tends to react poorly to any signs of weakness. That explains C.H. Robinson's sell-off today.