Morgan Stanley and Stifel's price targets for asset-light brokerages C.H. Robinson and Echo Global Logistics are at odds over
whether CHRW and ECHO are stocks worth buying.
We've reported previously on
investment banks' divergent views of the transportation sector, but this morning two new releases from Stifel FInancial
Corporation (NYSE: SF) and Morgan
Stanley (NYSE: MS) clarified exactly how the analysts
differ.
In brief, Morgan Stanley likes asset-based carriers while Stifel prefers asset-light 3PLs. The spreads between the banks' price
targets for the shares of publicly traded companies tell us how far apart the banks are.
One of the largest price target disagreements between Morgan Stanley and Stifel is C.H. Robinson (NASDAQ:
CHRW), North America's largest 3PL. Morgan Stanley's
12-month price target is $67, while Stifel's is $104: as we write, CHRW is trading at $82.90. That means that Morgan Stanley calls
for a 19 percent downside and Stifel projects a 25 percent upside for the stock.
The wide spread between CHRW target prices may be due to a deeper disagreement about risk factors to the core North American
Surface Transportation business – specifically C.H. Robinson's exposure to spot market volatility. Morgan Stanley's Ravi Shanker
said that decelerating spot rates would hurt CHRW; Stifel's Bruce Chan had a more sanguine view.
"We are slightly below cons[ensus] for CHRW in 4Q18," Shanker wrote. "DAT dry van spot rates ex. [fuel surcharge] have
decelerated from 3Q's 16% y/y to -2% y/y in 4Q (contract rates decelerated from 19% to 11% y/y). Assuming CHRW's spot exposure
remains consistent from 3Q (~40%), NAST revenue growth should decelerate sequentially."
Meanwhile, Stifel's Bruce Chan was more optimistic in a note on CHRW from November. "C.H. Robinson's core North American Surface
Transportation (NAST) division continues to drive not just growth, but increasingly profitable growth via incrementally better
technology and process improvements," Chan wrote. "Meanwhile, moderating capacity costs are helping gross margins."
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Anecdotally, competing brokerages have told FreightWaves that C.H. Robinson started off bid season by coming in with
aggressively low rates in a play for volume.
To us, it sounds like analysts can't decide whether a softening spot market helps or hurts C.H. Robinson, and therefore there's
a wild swing in the 12-month target prices. There's a similar confusion about Chicago-based brokerage Echo Global
Logistics, Inc. (NASDAQ: ECHO): Morgan Stanley's
price target is $22 (5 percent upside) while Stifel has ECHO at $34 (63 percent upside). The stock is currently trading at
$20.84.
"We are below cons[ensus] for ECHO in 4Q18," Shanker wrote. "Spot rates decelerated significantly from 3Q (ECHO's revenues were
+8% in October vs. +27% y/y in 3Q), and while contract margins will benefit from low spot rates, the benefit could be mostly offset
due to less high margin spot volumes. We expect gross margin to be flat sequentially in 4Q, consistent with seasonality."
It should be pointed out that Stifel has been lowering its price target for ECHO, from $40 to $38 to $34, but analyst Bruce Chan
thinks that even a cooling freight market with flat gross revenues could help ECHO expand its margins.
"But in our view, difficult y/y comps have been a known quantity," Chan wrote in an October 25 note on Echo, "and on an absolute
basis, spot rates remain healthy due to structural supply tightness, which we believe continues to drive demand for Echo's service
offering. Moreover, easing rates are typically beneficial for gross margins, and the company continues to pull the technology and
efficiency levers on other expense line items."
A systematic comparison of price targets for asset-based truckload and less-than-truckload carriers also reveals philosophical
differences between Morgan Stanley and Stifel. Aside from a few carriers like Heartland Express,
Inc. (NASDAQ: HTLD) and Saia
Inc. (NASDAQ: SAIA), Morgan Stanley has
higher price targets than Stifel nearly across the board.
There are particularly wide spreads on U.S. Xpress (NYSE: USX), which is trading at $5.84 today: Morgan Stanley has USX at $22 while Stifel set
the target at $15. While USX is the extreme case, both banks agree that most trucking stocks are underpriced to some extent; the
question is just how much. Knight-Swift (NYSE: KNX), for instance, which is trading at $27.36, could go to either $43 or $51,
depending on whether you listen to Morgan Stanley or Stifel, respectively. The difference comes out to a 57 percent upside versus
an 86 percent upside.
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