Investing in the logistics sector? The devil is in the detail. That appears to be the conclusion from Transport Intelligence’s recent report on the finances of the leading logistics businesses.
Logistics providers are a diverse bunch. Investors have the choice of businesses as capital intensive as FedEx or UPS at one end of the spectrum to the comparatively asset light examples of Panalpina or CEVA.
The report indicates that, generally, asset light businesses are most resilient against a difficult economic backdrop. For example, C.H. Robinson was hardly affected by the recession between 2007 and 2009 and has since grown aggressively with a 52% increase in revenue since by 2012. In this time, the company’s profits have grown 46%.
Yet in contrast, Panalpina- which is not wholly dissimilar in being an asset light forwarder, albeit operating in different markets- has seen a 20% fall in revenue and a 87% fall in profits between 2007 to 2012 (all based on an moving annual total). However, the case of Panalpina also highlights how difficult it is to measure comparative performance, with the Swiss forwarder’s financial results heavily influenced by the swings in the value of the Swiss Franc.
At the other end of the scale is UPS. The express and logistics giant’s profits have soared since 2007, up 668% on the back of a 6% rise in revenue. Although the increase is very impressive, key to understanding such a leap is the pension right-offs the company agreed to in 2007/08.
Overall, it appears that, under the current economic conditions, owning assets is not such a smart move. FedEx and UPS may be able to make it work, but it is much harder in a sector such as road freight, where the best performers tend to be non-asset based.
However, the most salient conclusion is that both the specific business model and the quality of execution is a more dominant factor in the success of a logistics service provider. Therefore, any investor looking to buy into the logistics sector needs to study not just market dynamics, but also the quality of individual providers’ management.
Ti’s latest report, Global Transport & Logistics Financial Analysis 2013 examines the financial structure and performance of the world’s largest transport and logistics companies through a range of financial ratios. Click here for more information or to take a look inside the report.