Expeditors International of Washington Inc. (EXPD
) detracted from performance during the quarter. Expeditors continues to exhibit a best-in-class return on invested capital relative to its domestic and international third-party logistics rivals and suppliers due, in part, to Expeditors’ lean capital base as well as its highly integrated network of agents in 60 countries around the globe. Not only does Expeditors negotiate shipping rates and consolidate customer freight for forwarding, but they also perform the extremely important function of customs broker for around 75% of their customers, by our estimates. To paraphrase a popular saying in the logistics industry, “you date your forwarder but you marry your customs broker.” In other words, freight forwarding and consolidation is a commodity, where rivals compete on price. It is the customs brokerage functions that add the most value for Expeditors’ clients, particularly for smaller to mid-size businesses that do not possess the scale or expertise necessary for worldwide distribution. These clients tend to be stickier than non-custom brokerage clients. However small and mid-sized businesses have been disproportionately affected by the global macroeconomic slowdown, so there have been substantially fewer profitable opportunities for Expeditors. In terms of growth, while Expeditors has registered a contraction in EPS, year to date versus 2011, we believe these depressed results are transitory, as trade growth is already at a historically low level relative to worldwide GDP growth. When trade reverts to the historical mean, we expect Expeditors will return to double-digit earnings growth, but in the mean time, the Company has $1.25bn of net cash on its balance sheet while the stock trades near decade-low valuations.
From Wedgewood Partners Third Quarter 2012 Review and Outlook