Roughly four months ago, on Feb. 20, Expeditors International of Washington Inc. (EXPD, Financial) had its IT systems hit with a cyberattack. It took roughly three weeks to get those systems fully back in operation.
Despite that challenge, the freight-forwarding company delivered respectable first quarter results and increased its dividend by 15.5%, double its five-year dividend growth rate. And now, with the share price down, it may be time for value investors to give it a look, in my opinion.
About Expeditors
Seattle, Washington-based Expeditors first opened for business in 1979 and upped its game significantly in 1981 when the seven founders all began working at the company. They quickly opened several other offices and, in the words of the company’s history, “Expeditors quickly becomes one of the largest U.S.-based forwarders of air freight from the Far East.” At the end of 2021, it had roughly 17,000 employees in 350 offices around the world.
Its describes its operations this way in the 10-K for 2021:
“As a third-party logistics provider, we purchase cargo space from carriers (such as airlines, ocean shipping lines, and trucking lines) on a volume basis and resell that space to our customers. We do not compete for overnight courier or small parcel business and do not own aircraft or ships.”
In addition, it provides a broad range of other transportation services, including customs brokerage, order management, warehousing and distribution, cargo insurance and tracking. The Project Cargo unit handles unique shipments that demand specialized attention because of unusual sizes or the nature of the shipment.
In full fiscal 2021, approximately 41% of its revenue came from airfreight services, 34% from ocean freight and ocean services and 25% from customs brokerage and other services.
Financial strength
A quick scan of the GuruFocus financial strength table shows Expeditors has little or no debt. Looking closer at the balance sheet, it looks like the company had no debt at the end of the first quarter of 2022, though it does have capital lease obligations. Short-term capital lease obligations were $85 million, while long-term capital lease obligations were $385 million. It also shows the company has $2.14 billion in cash and cash equivalents (with no marketable securities).
The Piotroski F-Score and Altman Z-Scores are both good, especially the Altman Z-Score of 6.64, which indicates there is no risk of bankruptcy.
The weighted average cost of capital (WACC) is just 6%, much less than the return on invested capital (ROIC) of 52.2%.
In part, it keeps its cost of capital down by generating large amounts of free cash flow. Over the past five years, it has grown its free cash flow by an average of 15.40% per year. In 2021, it generated $832.25 million worth of free cash flow.
Profitability
The company gets another excellent ranking for profitability. Although Expeditors’ margins are not industry-leading, its returns are exceptional, especially for return on equity. The table also shows it is outperforming its own results in previous years.
Growth
The company gets a strong ranking for growth, which is not surprising, given the growth rates for revenue, Ebitda and earnings per share without non-recurring items last year:
Dividends and buybacks
Expeditors’ current dividend yield of 1.17% is slightly lower than the current S&P 500 average of 1.49%. It has also picked up significantly since the share price dropped:
A low dividend payout ratio of 13% indicates the company has room to keep growing its dividend, though whether it will do so is anyone's guess.
Except for 2021, when the share count climbed slightly, the company has bought back shares every year for the past 10 years.
Valuation
As the 10-year chart below shows, the share price shot up during the Covid bull market and now has returned to what looks like its trendline:
The trendline embedded in the chart shows that price likely has reverted to the mean. For long-term holders, there was a brief, exhilarating ride followed by a return to reality.
Expeditors’ price-earnings ratio sits slightly below its peers and competitors in the transportation industry at 11.21 versus 13.28.
Over the past five years, the Ebitda growth rate has averaged 20.00% per year. Dividing the price-earnings ratio by 20% produces a PEG ratio of 0.56, which is well below the fair valuation point of 1.00.
The GF Value chart sees significant undervaluation, though it has also issued a value trap warning:
Personally, I do not think it is likely to be a value trap. Expeditors has a high Altman Z-Score, meaning there is a very low probability of bankruptcy, and both its top and bottom lines have been on the uptrend. The company has no long- or short-term debt, plus it has ready access to more than $2 billion in cash and cash equivalents. I would argue that investors should give more weight to the 10-year price chart (and its trendline) than the GF Value chart.
Overall, the company has a very high GF Score, reflecting strong growth, profitability, financail strength and momentum ranks despite a lackluster GF Value rank.
Gurus
Over many quarters in the past two years, the gurus have been net buyers of Expeditors, and particularly in the first quarter of this year:
Eleven of the investing legends followed by GuruFocus held positions in this stock at the end of the first quarter of 2022. The three with the largest positions were:
- First Eagle Investment (Trades, Portfolio), which reduced its holding by 0.09% and finished with 2,431,330 shares. That represented 1.45% of Expeditors’ shares outstanding and 0.61% of First Eagle’s assets under management.
- Jim Simons (Trades, Portfolio) of Renaissance Technologies increased ts stake by 1,025% to 990,616 shares.
- Steven Cohen (Trades, Portfolio) of Point72 Asset Management picked up 339,442 shares as a new holding.
Conclusion
Expeditors took a detour on the way to its current share price, blowing up into a bubble before correcting. Assuming it has returned to its previous, long-term trajectory, this looks like a possible value opportunity. The price has fallen slightly below its long-term average, while its fundamentals, overall, are excellent.
Value investors may wish to look more closely at this name, because it has no debt and is slightly undervalued. Growth investors will set it aside until it shows consistent increases in its share price. Income investors should look elsewhere.
