Third-party logistics firms escape slowing economy
BANGALORE (Reuters) - A slowing economy may be taking the steam out of many U.S. industries, but a bunch of companies that provide transportation capacity and warehousing services to manufacturers and retailers are holding their own.
These companies, also known as third-party logistics providers, are seeing a surge in business as firms increasingly look to cut costs by outsourcing their supply chain management.
Shares of some of the established third-party logistics companies like C.H. Robinson Worldwide Inc (CHRW.O) and Expeditors International (EXPD.O) have been trading around their lifetime highs.
Analysts believe specific third-party logistics providers will remain attractive not only because they are immune to rising fuel prices, but also because they are steadily grabbing market share from companies that have their own carriers.
"Their business model makes them less impacted by slower U.S. growth," William Blair & Co analyst Nate Brochmann said. "So, even if you have a little slowdown on the top line, you are still able to grow the bottom line."
Third-party logistics providers pick up wholesale capacity in all types of cargo carriers -- air, ocean, rail or road -- and this gives them more flexibility to plan shipments in a cost-effective way without actually owning transportation assets.
They are relatively shielded from ballooning oil prices as they pass along the fuel surcharge to the shipper immediately, because a lot of their business takes place in the spot market.
"When there is a rise in fuel price it shows immediately in the price component that is being charged to the client," says McAdams Wright Ragen analyst Mike Roarke.
For most trucking companies, fuel surcharges kick in after a bigger time lag as they are bound by contracts. So, when fuel prices spike, they are temporarily exposed.
In the first quarter of 2008, the American Trucking Associations reported that 935 trucking firms went bankrupt -- private equity firm Sun Capital's Jevic Transportation Inc being one of the biggest casualties -- hurt by rising fuel prices.
In contrast, shares of C.H. Robinson have soared 31 percent since April last year -- roughly the time when the turmoil in financial market emerged, dragging down the U.S. economy.
Expeditors shares have risen 12 percent during the period. Shares of Landstar System Inc (LSTR.O), one of the largest truckload capacity providers in North America, are up 20 percent.
In comparison, the Dow Jones transport average index .DJT, which includes package delivery companies such as FedEx Corp (FDX.N) and trucking companies like YRC Worldwide (YRCW.O), has risen 11 percent during the period.
Overall, Blair's Brochmann expects the third-party logistics sector to grow two to three times faster than the U.S. economy over the next 10 years.
MARKET MAKERS IN FREIGHT?
Supply chain management is getting increasingly complex, as companies source products from different parts of the world, while having to deal with rising fuel prices.
"Any sort of complexity in the supply chain would be an opportunity for logistics providers," Robert W Baird's Jon Langenfeld said.
Third-party logistics companies are cornering a big portion of the freight business as they offer better rates and handle all aspects of supply chain management.
"You can look at them as a market maker if you will for the freight space," McAdams Wright's Roarke said.
Last quarter, C.H. Robinson Worldwide posted a 23 percent rise in gross revenue, driven by growth in freight volumes as it took market share from trucking companies.
"Even though the economy is slowing, we still have some long-term trends that give us the opportunity to grow our business," C.H. Robinson CEO John Wiehoff said.
Wiehoff said opportunities arise when companies look beyond the shores to tap low-cost markets for meeting their production and manufacturing needs.
Last month, Landstar System forecast strong growth in second-quarter revenue, bolstered by increased haulage, and said it saw additional pricing opportunities as trucking capacity tightened.
The U.S. trucking sector has suffered from falling freight volumes since the third quarter of 2006 due to housing meltdown, and slow auto and retail sales. That has resulted in fierce competition among operators, pushing prices down.
INTERNATIONAL GROWTH
However, for Expeditors, which is an air and ocean space freight forwarder, the international market has been fuelling growth. The company's revenue rose 17 percent in the first quarter of 2008, with more than half coming from the Far East.
Blair's Brochmann feels that the company has plenty of opportunities to expand into the Asia-Europe freight lane and is well positioned to grow in Asia.
UTI Worldwide (UTIW.O) and United Parcel Service Inc's (UPS.N) supply chain and freight unit are some of the other third-party logistics players in the international market.
However, the specter of surging oil prices weighs on these companies in the long term. Oil prices hit an all-time high of $135.09 a barrel last week, driven by concerns that supply will struggle to match demand over the long term.
McAdams Wright's Roarke said no matter where the fuel prices or freight volumes are headed, these companies have the potential to grow for quite some time.
"They are operating in a huge market with plenty of business opportunities, regardless of the short-term fluctuations," he added.
Blair's Brochmann expects the third-party logistics providers to remain less hurt in the long run, barring a dramatic or prolonged slowdown in the U.S. economy.
(Editing by Anil D'Silva and Saumyadeb Chakrabarty)
