Retailers face a barrage of online competition as an increasing number of consumers are attracted by the lower cost and wider selection that the internet can offer. Australian investors that have been struggling to find a way to invest in the online shopping trend need look no further than CTI Logistics (ASX: CLX). While bricks-and-mortar retailers issue profit warnings, CTI Logistics continues to power ahead, boosted by the increased package shipping and processing needed to support online shopping.
Investors wanting to take part in the online shopping boom have often looked overseas to e-commerce retailers such as Amazon.com (Nasdaq: AMZN). Unfortunately, because so many other investors have had the same idea, you often need to pay a high price to invest in these global giants. Online retailing increases the need for transportation, (particularly parcels, logistics and warehousing) and yet companies operating in this field have been largely overlooked.
Logistics from A to Z
CTI Logistics provides transport, logistics and security services in Western Australia and has been publicly listed since 1987. With a market capitalisation of around $130 million CTI Logistics is still small by national standards, but has carved out a powerful niche in Perth (more on that later).
Operations are diversified across the entire logistics value chain, insulating it from soft demand in any one sector. The company's transport logistics division provides a range of services including on-demand couriers, parcel distribution and freight forwarding. The supply chain logistics division offers warehousing and distribution, as well as minerals and energy logistics and temperature controlled storage. Finally the company rounds out its product suite by offering security monitoring and document storage/destruction. It is a robust offering that enables significant cross-selling opportunities.
Recently the CTI's growth has accelerated, with both revenue and net income compounding at 28% per year over the last 3 years. Yet, perhaps because of the company's distance from most analysts, investors have been slow to catch on. Shares currently trade at an undemanding 12 times trailing twelve month earnings and with a dividend yield of 4%.
Network effects aren't just for Facebook
Despite the company's broad operational footprint and small market cap, CTI Logistics is big where it counts. The scale advantages enjoyed by large companies are often overstated by analysts. What matters most is not the total size of a company's operations but rather its market share within the specific market segments over which it is able to spread fixed costs. For example, a competitor's large delivery network in Melbourne would do little to strengthen its hand in Perth.
CTI Logistics has developed strong market share in the Perth delivery business. The company controls 30% of on-demand taxi-truck deliveries, 35% of on-demand courier deliveries, and 40% of same day parcel distribution in the city. This concentration allows it to spread the fixed cost of operating its fleet of vehicles over a greater volume of goods transported, thereby lowering the average cost of transportation and providing a bulwark against potential entrants.
When we talk about network effects it is usually in the scope of high flying tech stocks such as Facebook (Nasdaq: FB) or Twitter (NYSE: TWTR). Each incremental addition to these networks exponentially increases the value of the entire network itself due to the greater number of connections that can be forged between different nodes. The exact same dynamic is at play in CTI Logistics' parcel delivery network. Each new parcel enjoys very low marginal costs (what is one more parcel in a van?) while each new depot added significantly increases the value of the entire network.
The scale advantages and network effects have a self-reinforcing effect that have enabled CTI Logistics to maintain high returns on equity of around 18% while also growing revenues at a rapid clip.
Mining exposure
One broad exposure that may be currently weighing on CTI Logistics is the company's exposure to a mining slowdown. While it has direct exposure to mining through its energy and mining logistics divisions, the greatest impact would occur if a mining slowdown led to a broader decline in business activity in Perth. Over the long run this would likely be outweighed by the company's strong underlying growth, but it could cause some short term turbulence.
