Third-party logistics firms escape slowing economy

By Dhanya Ann Thoppil - Analysis

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.

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