Corporate profits have been singing "Nobody Knows the Trouble I've Seen" for a while. But "Things Can Only Get Better" would make a more appropriate theme song for this earnings season.
Like Howard Jones, third-party freight transport and logistics company C.H. Robinson Worldwide (NASDAQ:CHRW) probably feels optimistic about things in general. Profitable businesses typically spend more than unprofitable ones -- and companies whose stock prices are up 55% since last year undoubtedly have something to celebrate, especially when they beat earnings estimates.
Is this the turnaround?
Robinson isn't the only company to outpace Wall Street's guesses. Among the big timers to report bottom lines in excess of analysts' expectations this week have been cash-rich Apple (NASDAQ:AAPL) and exceedingly efficient Texas Instruments (NYSE:TXN). By tomorrow, we'll know if American Express (NYSE:AXP) and Amazon.com (NASDAQ:AMZN) will continue the trend.
With profits picking back up, business-to-business commerce should be due for a comeback, which Robinson would certainly welcome. The company has seen revenue shrink throughout the downturn, with sales down 15.6% to $1.95 billion in its third quarter.
Turning lemons into lemonade
Still, falling sales haven't killed the company's earnings, thanks to steadily improving margins. Net earnings grew 2% to $95.5 million, or $0.57 per share. And just take a look at the company's consistent margin growth over the past year:
|
Q4 2008 |
Q1 2009 |
Q2 2009 |
Q3 2009 | |
|---|---|---|---|---|
|
Change in Sales |
0.2% |
(15%) |
(17%) |
(15.6%) |
|
Increase in Gross Margin |
107 bp |
303 bp |
357 bp |
286 bp |
|
Increase in Operating Margin |
48 bp |
128 bp |
156 bp |
150 bp |
|
Increase in Net Margin |
18 bp |
71 bp |
90 bp |
84 bp |
Source: Company financials, author calculations. All changes are measured from the same quarter in the previous year. BP = basis point = 0.01 percentage points.
How do they do it?
Like almost every other company, Robinson slashed its personnel costs and other overhead in response to the downturn. But a surplus of transport capacity has also worked in its favor. By snatching up excess transport capacity cheaply on the spot markets and selling it at higher contract rates to transportation providers, the company has kept earnings growing even amid falling volumes.
However, methods that work in one climate don't necessarily translate well when times change. As capacity realigns with demand, Robinson's pricing power diminishes; as order volumes increase, its workforce may require reinforcements. Its transition into an economic recovery will certainly be interesting to watch.
Time will tell
When the fourth-quarter results come in, it will be a miracle if revenues for full year 2009 come anywhere near matching last year's sales. But I think Robinson will continue raising the bar in terms of earnings.
The problem for investors is that after the stock's big move up, it currently trades at 25 times forward earnings. That seems pricey to me, but I'd certainly watch it for future buying opportunities if the shares get a bit cheaper.
Do you think Robinson is a company you'd want to own even at these prices? Chris'll bet a load of laundry you won't say so in the comments section below.
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