CH Robinson Worldwide (CHRW) Offers Outstanding 30% Capital Gains Potential with a 2.4% Dividend While You Enjoy the Ride

Shares of CH Robinson Worldwide are on the bargain counter at $57. Even in the depths of the 2008 crash, they commanded a multiple of 20x trailing earnings. That is exactly what they command today, even though the world economy is finally beginning to show broad strength in Europe and Asia.

Recent upward revisions in US GDP figures bode well for the future, too.

While CHRW does some shipping, including fresh produce to wholesalers and restaurants, its real niche is logistics. If you do not like math, do not study logistics: it is the science of analyzing the least costly alternative for the shipment of goods. CHRW does it well: according to Etrade data, return on Assets, Equity, and Invested Capital, at 23%, 42% and 43% respectively, are at the very top in the industry.

Growing economic strength is the major reason why the company is expected to beat earnings estimates ($0.68 a share, to be reported in early February and $2.71 for FY 2013, according to Yahoo Finance) for the first time in nearly three years. Many companies will have reported their earnings by then: the strong performance of broad market indexes in the 4th quarter of 2013 already has led to many earnings revisions to the upside. Thus, if you wait for the earnings release, you’ll likely be chasing the shares at a considerably higher price than at present.

Earnings have been depressed because of costs imposed by digesting Phoenix International and Apreo Logistics, freight forwarding companies located in the U.S. (Chicago), and Poland, respectively. In addition, the freight forwarding sector, being more cutthroat, cannot boast as high a profit margin for CHRW as its other businesses. Both of these headwinds should lessen in the near future, making sales and earnings comparisons more favorable. In its November conference call, the company projected 5%-10% annual revenue and EPS growth for the next few years. Since then, GDP growth in the US and worldwide has been revised upward: the latter especially due to strength in the Eurozone.

2014 projected EPS of $3.01 therefore appears achievable and could easily prove conservative. As growth resumes and profit margins return to more traditional levels, some PE expansion should occur as well. A multiple of 25x trailing earnings was typical of periods in the past when CH Robinson was growing at these rates. Applying this multiple for 2014 earnings provides us with a target price of $75 a share by the end of this year which would be a 30% gain from current levels.

The company has a solid balance sheet with negligible long-term debt. Cash flow growth has been strong and the well covered dividend (payout ratio less than 50%) provides a 2.4% yield, well above the S&P500 yield of 1.8%. What about those return on assets and equity figures that were discussed earlier? They have been growing steadily over the last decade, and barely blinked in the 2009 crash.

Perhaps this explains why the shares are less risky than the overall market, with a beta of 0.7.

With strong support at $55 over the last 12 months, downside risk is limited. Especially encouraging is this support has held even though earnings reports (and revisions) have been disappointing over the last two years. Technically, then, the bad news appears baked into the current price of the shares. The good news coming up in 2014 should propel CHRW stock higher in the next few quarters.

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