Third-party logistics firms, or 3PLs, generate some of the highest returns on invested capital in our industrial stock coverage universe. Due to their asset-light business model, these firms’ margins generally are robust even during periods of weakness in freight shipping. Logistics providers benefit from international trade, and from the secular increase in the practice of outsourcing shipping functions. Shippers hire traffic management from 3PLs to reduce transportation costs, decrease fixed assets, reduce inventory expenses, and improve shipping accuracy. Together, these benefits allow shippers to focus on their core competencies. We project revenue growth at 3PLs to outpace global GDP growth, based not only on our expectation that a greater volume of goods will be shipped by expanding global exchange, but also due to our belief that logistics firms will gain a greater share of their customers’ transportation wallets.
We think now is a good time to give an update on macro observations that affects 3PL, and also take a look at a few measures of market volume. In addition, we’ll review these firms’ economic moats, and suggest some that we think may be on sale.
Logistics Firms Among Transportation Companies
Our transportation stock universe is comprised of third-party logistics providers, railroads, integrated shippers, truckers, marine shippers, and airlines. Generally speaking, among our six subsectors of transports, we consider 3PLs, railroads, and integrated shippers to have powerful competitive advantages, such as massive barriers to entry and powerful network effects that fend off competitors’ intrusions. However, due to low barriers to entry and difficulty in differentiating their services, we find most truckers, marine shippers, and airlines compete away profits, supporting no economic moat. These challenges do not prevent several outstanding operators from earning high returns, but we do not generally consider operational excellence sufficient to justify the presence of a moat. At present, we also consider to be a no-moat firm, since its most important segment, intermodal marketing, is in the development stage as a retail enterprise, replacing its legacy formerly cost-advantaged wholesale offering.
Similar to truck brokers, freight forwarders and intermodal marketing firms meet the gap between senders, and sea, air, and rail carriers. While skeptical of the value of the middleman, we consider 3PLs to be useful intermediaries, able to better serve both parties than if owners of shipments and owners of ships had to search for each other.
