Business Transaction: C.H. Robinson IPO

C.H. ROBINSONWORLDWIDE, INC.
8100 Mitchell Road
Eden Prairie, Minnesota 55344
(612) 937-8500
www.chrobinson.com

Founded in 1905, C.H. Robinson Worldwide, Inc. is the largest thirdparty logistics company in North America and a global provider of multimodal transportation services and logistics solutions through a network of 116 offices in 38 states and Canada, Mexico, Belgium, the United Kingdom, France, Spain, Italy, Singapore and South Africa.

Logistics can generally be defined as the management and transportation of materials and inventory throughout the supply chain. According to a leading industry consultant, the available domestic market for third-party logistics providers was $421 billion in 1996, only 5.9%, or $25 billion, of which was actually generated by third-party logistics providers. This same consultant predicts the market for third-party logistics to double to $50 billion by the year 2000, representing approximately 10% of the estimated $474 billion domestic market. The international logistics market is estimated to be three to four times the size of the domestic market, and both markets are highly fragmented.

Through its global multimodal transportation and distribution networks that provide seamless logistics services worldwide, C. H. Robinson has the capability of managing all aspects of the supply chain on behalf of its customers. As a non-asset based transportation provider, the Company can focus on optimizing the transportation solution for its customer rather than its own asset utilization, using established relationships with motor carriers, railroads (primarily intermodal service providers), air freight carriers and ocean carriers.

Throughout its 90-year history, C.H. Robinson has been in the business of sourcing fresh produce.Much of the Company's logistics expertise can be traced to its significant experience in handling perishable commodities. Due to the time-sensitive nature and quality requirements of the shipments, fresh produce represents a unique logistics challenge, and the distribution and transportation costs are significant compared with, and may exceed, the cost of the produce being shipped. The Company has developed a network of produce sources and maintains access to specialized equipment and transportation modes designed to ensure timely delivery of uniform quality produce. In response to demand from large grocery retailers and food service distributors, C.H. Robinson developed its own brand of produce, The Fresh 1, which is sourced through various relationships and packed to order through contract packing agreements. They have also leveraged their food sourcing and logistics expertise into the sourcing of food ingredients on behalf of food manufacturers.

The transportation industry historically has been cyclical as a result of economic recession, customers' business cycles, increases in prices charged by third party carriers, interest rate fluctuations, and other economic factors. Generally, in the transportation industry, results of operations show a seasonal pattern as customers reduce shipments during and after the winter holiday season. In recent years, C. H. Robinson's operating income and earnings have been higher in the second and third quarters than in the first and fourth quarters.

C.H. Robinson's sourcing business is dependent upon the availability and price of fresh produce, which is affected by government food safety regulations, growing conditions, such as drought, insects and disease, and other conditions over which they have no control. Sourcing of fresh produce accounted for approximately 20% of the Company's net revenues in 1994, 1995 and 1996, respectively. Shortages or overproduction of fresh produce affect the pricing of fresh produce, and prices are often highly volatile.Agricultural chemicals used on agricultural commodities intended for human consumption are subject to various approval, and the commodities themselves are subject to regulations on cleanliness and contamination. Concern about particular chemicals and alleged contamination has led to recalls of products, and tort claims have been brought by consumers. In connection with any recall, C.H. Robinson may be required to bear the cost of repurchasing, transporting and destroying any allegedly contaminated product, for which it is not insured.

C.H. Robinson's unique business philosophy has accounted for its strong historical results and has positioned the Company for continued growth. Their principal competitive advantage is their large decentralized branch network, staffed by nearly 1,300 salespersons who are employees rather than agents. These branch employees are in close proximity to both customers and carriers, which facilitates quick responses to customers' changing needs. C.H. Robinson believes that there are significant opportunities to gain more transportation business from both existing and new customers, through its existing branch network; by selectively adding domestic branches in response to customer demand and opportunities to serve new customers in new geographic areas.

Additional international branches are anticipated in order to better serve the local needs of their existing multinational customer base, while enabling them to gain new customers throughout the world.

Growth within the logistics industry is being driven by the continuing trend of companies to outsource their logistics needs in order to focus on their core businesses, and to better manage just-in time inventory systems while reducing costs. C. H. Robinson's ultimate goal is to assist the customer in managing its entire supply chain while being the customer's key provider of individual transportation services.

Over the last five years the Company has averaged an annual growth rate in revenues of 16.5% with the 1997 projection slightly off this pace. Although we have not conducted an in depth study, based on the stocks of companies we have studied, there seems to be a correlation between P/E ratios and growth. The higher the growth potential the higher the P/E. C.H. Robinson follows this format with a P/E of 21.46 based on 1996 earnings with annual growth projected in the same area as its P/E. C.H. Robinson has a strong logistics network already in place. However,maintaining its current stock price ($19.50 - $22.00 late December - early January) is predicated on its ability to sustain double digit growth while maintaining profit margins.

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