Like EXPD more logistics then actual shipping but good niche in the industry
Expeditors International of Washington EXPD
by Morningstar Analysts
Thesis 04-27-2007 | by Peter Smith
Expeditors is one of the top companies in an attractive industry.
Expeditors is a third-party logistics provider, which means it brokers freight transactions but does not actually move the goods itself, so it owns few assets. It acts primarily as a consolidator and secondarily as a forwarder of international air and ocean freight. As a consolidator, it purchases cargo space from airlines and ocean carriers and resells it to shippers at a lower price than they could obtain on their own. Once it has the cargo, it combines shipments into optimally sized (economically speaking) pallets and containers for shipment, creating value for itself in the process.
As a forwarder, Expeditors plays a similar role, but instead of prebuying cargo space and consolidating shipments, it simply forwards cargo to airlines and ocean carriers. Forwarding is less profitable than consolidation, so the company plays this role only when a given route does not yield sufficient volume for consolidation. In either case, the value for shippers is a lower shipping rate and wider carrier selection, while carriers get access to a broader array of shippers and freight.
In addition, Expeditors offers ancillary logistics services that add further value for shippers. Shippers are willing to pay Expeditors for its expertise in, say, customs brokerage to speed up a transaction and avoid hassles. In fact, Expeditors is so good at these services that other freight forwarders occasionally hire the company for these segments of their transactions.
Non-asset-based firms like Expeditors have among the highest returns on invested capital in the transportation industry, and competition is heating up as companies try to grab a piece of the pie. We believe Expeditors has several advantages that increase its customers' willingness to pay, earning the firm our wide moat rating. Its global network, customer relationships, unique compensation structure that discourages frivolous spending, and sophisticated IT system would be challenging to duplicate. The firm also creates value partially through scale (by consolidating shipments), which might discourage a new entrant.
We think the firm has plenty of room to grow as more and more shippers streamline their logistics operations. We also expect the firm to continue to perform well in a slowing economy because it will have greater purchasing leverage with transportation providers. Despite increasing competition, Expeditors should continue to exhibit industry-leading growth and returns in the coming years.
Valuation
Our fair value estimate for Expeditors is $56 per share. We forecast net revenue growth of 14% in 2007, 18% in 2008, and 16% in 2009; our long-term sales growth projection is 13%. The company will continue to benefit from growth in global trade and logistics outsourcing on the part of shippers, with the firm's ocean freight segment being a particular beneficiary in the next few years. We also expect the firm to continue to increase its market share. We project the net operating margin to reach 30% in 2007 and continue to expand upward based on our belief that operating income growth will outpace revenue growth, as it has for much of the past decade. We project capital spending to average around 6% of net revenue over the long term.
Risk
Expeditors is heavily exposed to the Asia-North America trade lane, and any slowdown in shipments between the continents would hurt the company. Capacity crunches among air or ocean carriers could result in the firm paying more for cargo space, which is a risk if it cannot pass along the higher costs. Expeditors relies on the service quality of its carriers, which can vary. Currency fluctuations could affect results in the short term. Terrorism could temporarily disrupt freight movement.
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Close Competitors TTM Sales $Mil Market Cap $Mil
Expeditors International of Washington 4,718 9,016
* EGL 3,264 1,900
* UTi Worldwide 3,561 2,750
* United Parcel Service B 47,932 78,422
* FedEx 34,557 34,280
* TNT NV ADR 12,575 18,378
* Morningstar Analyst Report Available | Compare These Stocks
Data as of 12-31-2006
Strategy
Expeditors cultivates close relationships with major retailers and technology firms, since their goods typically need to be moved more quickly than those of other firms. Growth has been almost entirely internal, unlike some of its peers', and we see no reason this will change. The firm has a unique compensation structure that encourages employees to keep costs as low as possible.
Management & Stewardship
Expeditors is exceptionally well managed, in our opinion, and earns our highest Stewardship Grade. Chairman and CEO Peter Rose has led the company for almost 20 years, and we think he has done a fantastic job. He has helped build a firm that is among the most profitable in the industry, with a strong record of internal growth on his watch. He has also steered the firm away from potentially disastrous acquisitions, something that has hampered several of its peers. We like that several of his lieutenants came from other international freight forwarders and are generally an experienced bunch. We are particularly enamored with the company's unique compensation structure and candid disclosure. Executives earn very small fixed salaries, while the variable component is based on operating profit. This philosophy provides an incentive to maximize profitability and extends down to each branch manager, spilling over to the rank-and-file employees, who also share in the bonus pool. From a corporate-governance standpoint, we like what we see, though we would prefer to have the chairman and CEO positions held by separate individuals. Given the firm's laudable record of creating shareholder value, however, we're not terribly concerned.
Profile
Based in Seattle, Expeditors is primarily a consolidator and secondarily a forwarder of international air and ocean freight. It buys cargo space in bulk and resells it to customers needing shipping services. Expeditors also provides customs brokerage and other related logistics services. Its freight brokerage business primarily involves shipments to and from Asia, the United States, and Europe, with the first two constituting the bulk of business.
Growth
Expeditors has an exceptional record of top-line growth, and we believe it can keep it up. Growth opportunities abound, including increasing global trade, increased outsourcing from shippers, and greater participation in the Europe-Asia trade lane.
Profitability
Returns on invested capital at Expeditors are very impressive, typically reaching 20% and sometimes surpassing 30%. We think the firm can maintain its profit margin and potentially expand it by handling higher volume.
Financial Health
We have no concerns about Expeditors' financial health. The company has very little debt (including off-balance-sheet liabilities) and generates robust free cash flow. We wouldn't mind seeing a higher dividend, though.
