Good times rolling down the road for C.H. Robinson, XPO

Two big brokers and third-party logistics (3PL) providers are just getting bigger.

Second-quarter results released in the past two days from giants C.H. Robinson Worldwide, Inc., and XPO Logistics Inc. reinforced the notions that business is quite good, and that the big boys are effectively balancing their capacity needs and shipper demand.

Eden Prairie, Minn.-based Robinson, which reported results Tuesday, said second quarter net revenues-revenues after transportation costs—increased 17 percent year-over-year to $671.5 million, with solid growth across the major shipping modes as well as customs services. Total revenues grew by 15.3 percent to $4.3 billion, with growth across all service lines, Robinson said.

The company's core "North American Surface Transportation" unit posted gross revenue gains of 20.9 percent and net revenue gains of 21.4 percent, a reflection of strong demand, tight capacity and the higher freight rates they produced. Operating income surged 31.4 percent, Robinson said.

Robinson Chairman and CEO John Wiehoff said the company saw a slight moderation in the pace of buying and selling price gains. However, the trend toward higher end-to-end pricing grew for the fifth straight quarter, Wiehoff said. "We believe that the current freight market fundamentals will remain in place for the remainder of the year," he said.

Wiehoff's comments were echoed by Benjamin J. Hartford, analyst for investment firm Baird. Channel checks with customers show "expectations for robust demand and continued tightness in freight fundamentals" for the rest of the year, Hartford said. While daily net revenue in July is exceeding expectations with a 20 percent year-over-year gain, more difficult comparisons starting with the latter part of the current quarter will result in decelerating net revenue growth in relative terms, he added.

The news was also very positive at Greenwich, Conn.-based XPO, which reported results yesterday. Revenue rose to $4.36 billion, up 16 percent from the 2017 second quarter. Transportation revenues increased 14.5 percent, while logistics revenue rose 19.1 percent, helped by a 4.7 percent gain from favorable currency fluctuations. Brokerage net revenue surged 46 percent year-over-year, XPO said.

The company's less-than-truckload (LTL) unit reported an operating ratio of 84.3 percent, its best operating ratio since the forerunner company, Con-way Freight, began tracking it in the late 1980s. Operating ratio is the ratio of operating expenses to revenues, and is an important metric of a carrier's efficiency and ultimately, profitability. The company realized, on average, a record 6.4 percent pricing increase on LTL contract renewals, according to XPO Chairman and CEO Brad Jacobs. "This is the best LTL market that's ever existed," Jacobs said in a phone interview yesterday.

Jacobs said the company generated $1.1 billion in new business during the quarter, the first time in XPO's 7-year history it has done that. Its logistics division launched 37 start-up contract projects in the quarter, also a record. From June 2017 through the end of this June, XPO added 21 million square feet of distribution center space, he added.

According to Jacobs, July has the been XPO's best month so far this year, an indication that its momentum shows no signs of abating.

Bascome Majors, transport analyst for investment firm Susquehanna Capital Group, lauded the results, but advised investors that a decision to put new money in XPO shares should be based on Jacobs' ability as an efficient capital allocator and not on a belief that logistics is in a secular bull phase. With management and employees appropriately incentivized to perform, the faith in Jacobs' business instincts "is a bet we're willing to make," Majors said in a note today.

Jacobs has said that XPO plans to make one, and perhaps two, large acquisitions in the foreseeable future. Jacobs took the unprecedented step of acquiring and integrating 17 companies over a four-year span. Though many doubted his chances of pulling it off, he has managed to structure a $16-$17 billion a year trans-Atlantic powerhouse that, above all, is profitable. XPO has been off the acquisition trail for nearly three years.

Jacobs declined comment on XPO's acquisition plans other than to say that any transaction will be done thoughtfully and with the goal of dramatically increasing shareholder value. "Right now, we like the business we have, and the prospects we have," he said.