| Thesis 06-14-2010 | | Expeditors International of Washington is the performance leader among non-asset-based freight-forwarding and third-party logistics providers. Investors seeking exposure to the growing international shipping market will be hard-pressed to find a more profitable firm. We believe Expeditors' record of steady growth, high margins, and high returns on invested capital supports a wide economic moat that will deliver the goods to shareholders for years to come.
As a freight forwarder, Expeditors owns no asset-intensive fleet of ships or planes, preferring to focus on the complex task of modern international shipping using its extensive global network. The firm purchases cargo space on planes and ships, then fills these reservations with cargo it compiles from clients. Clients benefit from outsourcing the complex tasks of international shipping (communicating in multiple languages, scheduling truck shipping on both ends, consolidating less-than-container loads, clearing customs, warehousing, and paying tariffs) and tapping into shipping rates negotiated by a large-volume broker like Expeditors.
The firm has strong relationships with suppliers and buyers, built by years of reliable delivery. Expeditors operates 255 sites on six continents, with particular strength in the highly profitable Asia-North America channel. A new entrant looking to replicate Expeditors' capability faces a costly conundrum: A shipping network's value is enhanced by having many nodes, but financially supporting so many points demands high volume to pay for the reach of the network. It's easy to see why competitors have chosen to collect businesses with existing traffic and revenue rather than start from scratch, but Expeditors has chosen the latter. This strategy of building instead of buying is not only more economical, but it also maintains a single information system and a consistent culture. Given the high costs of technology to provide data to clients, small firms are likely to be consolidated into acquisitive firms.
Corporate culture plays a powerful role in Expeditors' strong performance record. The firm's profit-conscious employees are motivated by bonuses tied to their office's operating profit. This entrepreneurial culture, wherein every employee is a salesperson, is imitable, but Expeditors leads its peers in implementing this strategy. Executive management is fiercely independent, expanding the firm as it knows best, rather than catering to financial market opinions. Expeditors' remarkable performance confirms the wisdom of this strategy. | |
| Valuation | | | Our fair value estimate for Expeditors is $44 per share. In our valuation model, we project long-run net revenue growth around 14% per year. We expect the business cycle to induce some noise around this number and note that as the firm grows, percentage increases on a larger number become increasingly difficult. The firm logged record 29% net operating margins during 2006-08, improving on its 25% average margin during the previous five years, and produced 28% net operating margins even during a tumultuous 2009. Expeditors earned net operating margins double those of close competitor UTi Worldwide for the same period. While we project that the company can sustain its net operating margins in the long term, we don't expect additional margin expansion opportunities. | |
| Risk | | | Facilitating international trade is the core of Expeditors' business. We have increased the uncertainty rating of our fair value estimate to medium from low, because projecting near-term volume trends is more challenging during the present quickly changing recessionary environment. Currency and political risk are inherent in a business with such international exposure. Given the high margins earned by delivering trade to and from Asia, lower exchange with this region degrades performance. | |
| | Close Competitors | TTM Sales $Mil | Market Cap $Mil | | | | Expeditors International of Washington, Inc. | 4,381 | 7,530 | | | * | UTi Worldwide, Inc. | 3,854 | 1,386 | | | | * | Morningstar Analyst Report Available | | | Data as of 04-30-10 | |
| Strategy | | | The firm generally builds rather than buys its network offices. Strong operating results and a history of growth support management's claims that its strong culture--a byproduct of smart, variable compensation--motivates employees to build the business and shrink expenses. The firm continues to expand its share of the market, increasing net revenue at a double-digit pace. | |
| Management & Stewardship | | | Expeditors' proven management team has delivered steady growth and profitability for years. Several of the company's founders are still in the top ranks. Management wields compensation as a powerful tool, paying a relatively moderate base, but offering a clear plan for substantial incentive pay. Employees are motivated to expand their shop's operating margin, so sales growth and cost management are important to each office. Management supplies clear financial reports, including publishing written responses to investor questions on a periodic basis. These 8-K filings reveal an independent, even irreverent attitude toward Wall Street. We find management's unabashed focus on running its business for the long term to be a refreshing, healthy contrast to the more common defense of slight short-term deviations. For example, counter to the trend common among transportation firms, Expeditors refrained from laying off employees to cut costs during the recession, choosing instead to preserve its well-placed network with a focus on long-run performance. Sticking to its principles, Expeditors paid CEO Peter Rose total compensation of $4.8 million in 2009, when business contracted, down from $6 million in the prior year. | |
| Profile | | | Expeditors International of Washington is a non-asset freight-forwarding and logistics provider. To help customers ship goods across borders, the firm employs strong relationships with airlines, steamship carriers, and governments, sophisticated information systems, and outstanding cost management to earn industry-leading margins. The firm derives around 35% of consolidated revenue from air freight, 25% from ocean freight, and 40% from customs brokerage and other services. | |
| Growth | | | Expeditors increased revenue at double-digit rates for more than a decade. Building from geographic segment performance, we project that the firm will boost its top line at a similar pace over the long run. | |
| Profitability | | | Expeditors is highly profitable, earning a 29% net operating margin in 2006-09, and averaging a 20%-plus net margin during the past 10 years. Asia trade lanes lead the way, contributing 27% of revenue at an EBIT net revenue margin exceeding 40%. | |
| Financial Health | | | Expeditors has no long-term debt and holds $1 billion in cash--much more than required for operations. In 2009, the firm generated $385 million in operating income and $10 million in interest income. | |
| | Morningstar Rating 
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| | Stock Price | | As of 06-14-2010 | | $37.81 | | | Fair Value Estimate | | | $44.00 | | | Consider Buying | | | $30.80 | | | Consider Selling | | | $61.60 | |
| | Fair Value Uncertainty | | | Medium | | | Economic Moat | | | Wide | | | Stewardship Grade | | | A | |
| | | Bulls Say | |  | Expeditors' revenue growth is predominantly internal, and has been clipping along at a steady pace. During the five years preceding the 2009 freight recession, Expeditors compounded growth at a double-digit pace. | | | | Expeditors' profitability is best in class among public U.S. freight forwarders--double that of close competitor UTi Worldwide. | | | | Expeditors' non-asset-based model generated an average return on invested capital of more than 30% during the past five years. | | | | International third-party logistics service and freight-forwarding is a strong and growing industry. | | | | Client concentration is low: No single customer accounts for greater than 5% of revenue. | |
| | | Bears Say | | | A slowdown in global exchange will diminish the pool of available business for Expeditors. | | | | The firm holds cash reserves well above levels needed to conduct business. Interest income reflects a return on cash and short-term investments well below the firm's return on capital invested. | | | | The firm is subject to a variety of risks because of its reliance on international operations, including political and currency risk. | | | | In its attractive and growing market, Expeditors competes with worthy firms like DHL and Kuehne + Nagel. It also competes with industry giants United Parcel Service and FedEx . | |
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