Radiant Logistics Applying A Familiar Model To A Fragmented, Growing Sector

The third-party logistics (or 3PL) industry is huge, with some estimates of the addressable opportunity ranging from $160 billion to $190 billion just in the United States. Radiant Logistics (NYSEMKT:RLGT) isn't targeting all of that, or at least not yet, but the company's operations in truck and intermodal brokerage and freight forwarding do cover around one-half to two-thirds of the potential market. Radiant is still a relatively small player in comparison to companies like C.H. Robinson (NASDAQ:CHRW), XPO (NYSEMKT:XPO), Landstar (NASDAQ:LSTR), and Echo (NASDAQ:ECHO), but the company's growth-by-acquisition strategy has been used successfully many times over in this space and its addressable markets remain very fragmented.

At this point, it looks to me like the Street may be too skeptical about Radiant. While there have been recent challenges from soft demand and excess capacity, those circumstances seem to be improving. Uncertainty about U.S. trade policy is another risk factor, as is the possibility that the company will overpay for future acquisitions and/or struggle to integrate them. Recognizing those risks, I still believe there are meaningful opportunities here as the business scales up, and I think the shares look pretty interesting below $6/share.

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Radiant Logistics Applying A Familiar Model To A Fragmented, Growing Sector

Seeking Alpha: XPO's Painful Climb Toward The Top

It has been a little over a year since I last wrote on XPO Logistics (NYSE:XPO), and I'd like to say that time flies when you're having fun, but that's not the case. As it concerns XPO, the company has used that intervening time to take a very big step toward its goal of being a market share leader along the waterfront of logistics and freight service, but at the cost of significant investor angst and a sharp re-evaluation of the "right" multiple for the business.

The share's value has fallen close to 40% since I last wrote, and my $50-plus fair value at that time was predicated on the company remaining a growth-oriented asset-light third-party logistics company. Instead, the company has pivoted toward a much more balanced asset-heavy/asset-light mix. While that isn't necessarily a bad strategic move, it does change the long-term complexion of free cash flow generation, the volatility of those cash flows, and the multiple the market will be willing to pay for the shares.

There seems to be a recurrent communication issue between the Street and the company, and that concerns me. I don't know if it stems from management being more freewheeling and flexible in its long-term plan than previously thought, or whether there's more of a "making it up as we go along" element to it. In any case, while I do see meaningful value here, management has a lot of work to do to reassure investors about its long-term strategy and about the true synergies of mixing asset-heavy and asset-light businesses in the transportation and logistics space.

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XPO's Painful Climb Toward The Top

Investopedia: J.B. Hunt - The Trucking Company That Isn't

As the economy has rebounded and so too has the transportation sector. After all, it's not too easy for companies to sell more "stuff" and not need additional transportation services. While the railroads have been on a much-discussed run since 2009, trucking companies have had a more mixed performance.


Making matters a little more complicated, although J.B. Hunt (Nasdaq:JBHT) is often listed among the trucking companies, that is not really an accurate depiction. In point of fact, intermodal business is the single largest component of the company's revenue and income. What's more, the differences in JBHT's business model seem to go a long way towards explaining why this company has been a solid performer. (To read more on financial statements, see 12 Things You Need To Know About Finncial Statements.)

Strong Demand Leads to Strong Quarter
J.B. Hunt reported a better than 18% jump in revenue for the first quarter, with 13% growth once the impact of fuel surcharges are stripped out of the picture. Intermodal was the leader both in growth and scale, as revenue grew 23% here to $577 million (about 58% of the total) on the back of 15% volume growth. Dedicated contract services saw 15% revenue growth, while revenue from the truck segment rose 6% despite an 11% decrease in loads and a 12% decrease in tractors on the road.


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Investopedia: Rail Traffic Data Still Largely Good News

Another month has gone by, but the data concerning rail traffic in the U.S. is still positive. That, in turn, is another positive read for the economy overall, as well as industrial and material companies. And of course, let us not forget the rail companies - so long as rail traffic continues to climb, that is a tailwind for the sector as well. 

January's Data Mostly Positive 

For January of 2011, the Association of American Railroads reported that U.S. train carload traffic rose 8% from the year-ago level. The level of traffic seen in January also represented a 1.5% sequential increase from December's levels. Of the 20 categories tracked by the AAR, 15 saw carload growth in the month, with coal (always the biggest commodity for railroads) posting above-average growth of 8.8%. Grain traffic was also notably higher (up 10%), while sand, gravel, and aggregate shipments climbed 16%. The biggest laggards, waste/nonferrous scrap and nonmetallic minerals, were both down by double digits, but represent less than 3% of normal rail traffic anyway. (For more, see Rail Traffic Points To An Ongoing Recovery.)

Investors may want to pay attention to the "mostly positive" part of this news, though. For although U.S. rail traffic was again strong, U.S. intermodal traffic may be softening up. For January, intermodal traffic was up 7.4% on a year-on-year basis and 1.8% on a sequential basis. That is still quite good, but I believe this is the first quarter in quite some time where the year-on-year increase in rail traffic exceeded the increase in intermodal. It may mean nothing at all, or it may be a sign that international trade activity is lightening up a bit.

Also of note is the performance in Canada: Canadian traffic was down in January on an annual (-1.6%) and sequential (-5.9%) basis and although intermodal volumes were positive, they were not terribly strong. Seeing as how a lot of Canada's rail traffic is part of the "stuff trade" - mostly moving commodities to shipyards for export - this is worth watching as it pertains to commodity demand growth. If China and India are cutting down on the coal, lumber and metal they buy from Canada, that would not be positive for Canadian Pacific (NYSE:CPI) or Canadian National (NYSE:CNI), though both also have operators in the United States.

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Investopedia: Rail Traffic Has A Strong End To A Rebounding Year

December may generally be a slower month for transports, but the recovery in rail traffic continued on through the last month of 2010. This continues what has been a relatively strong rebound from mid-2009, though the recovery has only recaptured about half of the former level of weekly carload traffic. Not only is this encouraging news for rail investors who continue to hang on to these relatively strong stocks, but it should be encouraging to any investors weighted towards economic recovery/expansion plays.

The December Data Continues The Trend
According to the Association of American Railroads' monthly Rail Time Indicators, U.S. rail traffic was up 9.4% in December of 2010, relative to the prior year. If that sounds like a strong result, it is - the pace of annual improvement had been slowing a bit, but December's result represents some reacceleration above the full-year 2009 growth of 7.3%. Growth was likewise strong in the intermodal market, as traffic here increased 13.3% on an annual basis.

Putting the data into a bit more context, the recovery is strong but still has a ways to go. Although December traffic finally surmounted the 2008 level, it was because the data finally annualized the steep declines that began in late 2008. Relative to 2007 and 2006, traffic is still down about 10-15% on a weekly basis. (For more, see Core Stocks For 2011.)

Details Matter
While there is still a sizable gap between today's traffic levels and the "normal" levels of 2006-2008, there is at least one reason to be skeptical that a strong recovery in traffic can continue. Traffic levels in cargo closely tied to the housing boom - forest products (lumber) and aggregates (gravel, cement, etc.) - have not really recovered much (though they have rebounded off a bottom) and there are no signs pointing to a quick turnaround. On the other hand, rail traffic in categories like chemicals and grain are much closer to pre-recession levels. (For more, see Rail Traffic Points To An Ongoing Recovery.)

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Investopedia: The Logic Of Logistics Stocks

A great deal of ink is routinely spilled on the virtues of inventing a better mousetrap or finding a better way to make that mousetrap. It is less common, though, to see the same attention given to figuring out better ways to get those mousetraps onto store shelves. While most investors are likely quite familiar with the railroad and trucking industries, and their links with a recovering economy, the same may not be true for those companies that specialize in third-party logistics and serve as intermediaries between the producers and shippers.

To that end, then, it is worth exploring whether the logistics industry is a good investment destination in today's market.

The Industry
As a very simplified explanation, these companies thrive by stepping between shipping customers and shipping providers and making life easier for both. Handling the logistics and shipping can be a major headache for companies, particularly smaller operators, and shippers can charge punishing rates for deliveries that are inconvenient or inefficient for them. On the other hand, transportation companies really do not relish the headaches and hassles of dealing with thousands of customers and having to tend to their specific needs.

Enter the third-party logistics specialists. These companies can not only consolidate shipments and negotiate bulk discounts, but they can handle many of the details that bedevil smaller customers. On the flip side, they offer the large rail, trucking and freight concerns a large consistent customer with a thorough understanding of the business and a minimal need for hand-holding. Producers save money, transporters save money and the companies in between make money.

The Companies 
C H Robinson Worldwide (Nasdaq:CHRW) is the largest domestic truck broker in the U.S., and gets about three-quarters of its revenue from truck brokerage. The company is also looking to expand into the growing international air and ocean freight forwarding business. This should reduce some of the cyclicality of the business.

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