Retailers and industrial manufacturers need each other the way theaters and movie makers or shoe makers and shoe stores do. You can’t really have one without the other unless you’re Apple (NASDAQ:AAPL) or Nike (NYSE:NKE) and sell your own goods at your own branded stores.
The link between retailers and manufacturers is not often discussed: It’s the trucking and logistics companies. When you think of trucks, you think of burly drivers and heavy-duty diesels, but the reality is that the transportation business is very technologically advanced.
To my model, one of the more intriguing players is Echo Global Logistics (NASDAQ:ECHO). It’s a $400 million supply-chain-management company that provides transportation-logistics services such as rate negotiations, tracking, freight-bill management and reporting, and other shipping services.
There are four types of logistics-services companies. Manufacturers and retailers are first-party logistics (1PL) companies. They often outsource the transportation of their products, and that’s where the rest of the supply chain comes into play.
A second-party logistics (2PL) firm is hired by 1PL companies to ship their goods by air, sea, rail or truck from the manufacturer to regional retail locations or warehouses. These include companies such as UPS (NYSE:UPS), FedEx (NYSE:FDX) and other carriers that typically own the trucks or ships they use to transport goods.
Third-party logistics (3PL) companies such as ECHO offer comprehensive freight-distribution services along the transport chain, including warehousing, terminal operations and packaging and labeling services.
Fourth-party logistics (4PL) firms round out this specialized sector. They are comprised primarily of independent consulting firms such as Deloitte and Accenture (NYSE:ACN) that help manage the logistics process, regardless of what carriers or warehouses are used.
ECHO specializes as a ”non-asset based” 3PL, which means it doesn’t own any transportation equipment. It has developed a network of shippers and carriers, along with its proprietary technology systems, to provide efficient, cost-effective transportation solutions to manufacturers and retailers.
One might wonder what the benefit would be of using the services of a firm like ECHO. According to Matthew Young, an analyst with Morningstar, small shippers can enjoy lower transportation costs than they could generally obtain on their own directly with carriers. Larger shippers, with their own internal logistics departments, can outsource specific functions to ECHO, reducing the need to manage hundreds of carrier relationships themselves.
Think of ECHO as a specialized travel agent for manufacturers and retailers, handling all the transportation details for their products in a efficient, cost-effective manner.
The company generates about 80% of revenues from domestic truck brokering, with international air and ocean freight-forwarding services the next biggest sales generator. The heart of ECHO’s business is its ETM technology platform, which allows it to analyze client transportation requirements and provide customized solutions that help provide cost savings.
The platform can track individual shipments, transfer shipment data to financial-management systems and create customized reports detailing carrier activity. The goal is to provide its clients with higher visibility and business analytics to control their freight costs.
ECHO is still a very young company, founded in 2005 and only becoming publicly traded three years ago. As a result, it’s still in high-growth mode, with 2011 revenues rising 41.4% and net income by over 118%.
ECHO has very aggressive growth objectives for 2012, with a plan to add 100 to 120 sales and customer-service positions while looking to add 20 to 40 accounts to its enterprise customer base.
Douglas Waggoner has served as chief executive since 2006. Prior to joining ECHO, he founded his own freight-management software provider, SelecTrans, and has been in the transportation industry since 1986. He took over for founders Eric Lefkofsky and Bradley Keywell, who oversaw day-to-day operations during the company’s startup period.
For a young company, ECHO is in good financial shape, sporting a debt-free balance sheet and stringing together a second consecutive year of positive operating cash flow in 2011.
Shares are trading at 18.6 times next year’s earnings, but since ECHO is averaging 61.2% annual earnings growth over the past three years, that’s pretty cheap.
