Expeditors International of Washington Inc. (EXPD) started business in 1981 as a coordinator of airfreight shipments from Asia to the U.S. Since then, this North American third party logistics provider has built a vast network that has enabled it to position itself among the top 10 global freight forwarders. The company specializes in both ocean and air international freight and also provides customs brokerage services. The firm operates about 250 offices on six continents.
Expeditors employs an asset-light business model, contracting with air and ocean carriers for the wholesale acquisition of cargo space, which the company then fills with customers’ freight. Thus, the firm has more earnings flexibility, which helps shield profitability in economic downturns. Moreover, the company has no debt, holds huge cash reserves and generates strong cash flows. It also boasts industry-leading profitability and a decade of consistent net revenue growth averaging 12%.
Its solid leading position stems from the firm’s focus on organic growth, contrary to peers like UTi Worldwide Inc. (UTIW), which has grown via acquisitions. This approach has enabled the firm to build a cohesive network. In addition, the company has achieved a performance record via a profit-conscious culture, with commission-based salesforce compensation and managers’ bonuses tied to operating profit and branch net revenue growth.
A Wide Economic Moat
Expeditors’ extensive global presence and its immense network of shippers and carriers have earned the company a wide economic moat which also generates relatively high barriers to entry. Its customer base of thousands of shippers allows great buying power which results in lower rates that translate into material cost savings for customers. The firm is also attractive for carriers since its ability to aggregate fragmented demand represents an attractive source of freight.
Furthermore, the company continues to open new offices to cover increasing demand. Thus, it empowers its value proposition through more business touchpoints while it spreads IT and corporate costs over a greater number of revenue-producing locations.
Expeditors' airfreight is its primary source of revenue, accounting for 44% in 2012. Moving forward, growing activity between the U.S. and China, a trade lane in which the company has a solid position, will continue to strengthen its airfreight business. Also, the shipping of electronic products such as Samsung Galaxy Note III and iPhone 5S is expected to empower revenue growth. Moreover, the company seeks to expand its high-margin customs brokerage business, which produced a 7% increase in fourth quarter 2013, as a spill-over effect of a rising freight demand. Greater revenues are also expected in the near term from the housing and construction material market, in which the firm is well positioned, given the gradual recovery of these industries. In addition, the company is driving heavy cost-control measures which will further bolster margins.
A Strong Balance Sheet
Expeditors boasts a healthy balance sheet with no debt and solid cash flows, which the company diligently redirects to investments as well as to increasing shareholders’ returns through share repurchases and increasing dividend payments. The firm’s stock trades at 23.6 times its trailing earnings compared to the industry median of 23.4. Its return on equity showcases an attractive 16.4% against its rivals’ average of 6.10%, and its return on capital an outstanding 65.50% compared to a lean 7.30% average for its peers. It earning per share growth is also encouraging, reaching 12.3% compared to the industry average of 8.50%. Investment guru Joel Greenblatt (Trades, Portfolio) recently increased his holdings in the company by 401.74% in accordance with my bullish feeling about Expeditors' solid growth potential.
Disclosure: Vanina Egea holds no position in any stocks mentioned.