EXPD - Expeditors International of Washington, Inc

[Guest Schwab711]

EXPD is one of the largest freight forwarding companies in the world, with a focus on air and ocean freighting for importers and exporters around the globe.

 

EXPD is a bit unique in it's corporate governance. The company has more than $1b in net cash (roughly 9% of the market cap) and they post an 8k after each quarter responding to selected inquiries from investors throughout the quarter. What's unique is the quality of disclosure and transparency for an S&P 500 company. The company has historically been realistically conservative in their guidance to investors.

https://investor.expeditors.com/financial-information/8k-q-and-a

 

The reason I think EXPD is especially compelling now is the recent tax plan and improved global freight forwarding outlook.

 

The company is the largest freight forwarder in the US and primarily competes with international companies. EXPD will be able to repatriate their their ~$500m in foreign cash to increase buybacks. In addition, EXPD guided for a FY18 effective tax rate of 31%-34%, which I think will be higher than rates in future years. I think EXPD will end up around 25% or so eventually.

 

EXPD has an operating margin of 9% - 11% historically (on gross revenue), with approximately 10% in FY17. Net revenue and net margins are generally steady and thus, proportional. In addition, some analysts expect further margin expansion towards the 11% figure. Thus, the FY17 pre-tax earnings of $720m seems like a reasonable base to project from.

 

As of 2/20/2018 $62.00 stock price):

MC: $11.0b

EV: $10.0b

 

EBT: $720m

NI (32.5%): $486m

NI (25%): $540m

 

EV/EBT: 13.9x (7.2% pre-tax yield)

EV/NI: 20.6x (32.5% tax rate)

 

EV/NI: 18.5x (25% tax rate)

 

DCF:

1. Growth of 5%

2. Assume 30% tax rate (roughly what a blend of 32.5% near-term and 25% long-term works out to)

3. discount rate of 9%

 

 

I get a value of the operations of $9.825b or $10.875b with the net cash. That works out to $61.25/share. I think growth could come in higher and margins may tick up some. The possibility of multiple expansion, given current economic conditions, seems more plausible then not. I think expected returns for EXPD are conservatively around 10% compounded right now, which isn't a bad deal imo given the risk involved here.

 

For small investors, nearly 100% of earnings are reinvested at the earnings yield of the stock due to the combination of dividends and buybacks. Net of foreign cash (~$500m mentioned above), the company has a ROE and ROIC of ~33%.

[Broeb22]

Why won't there be pricing pressure from...you guessed it, Amazon?

[Guest Schwab711]

Why won't there be pricing pressure from...you guessed it, Amazon?

 

International customs is hard.

 

I remember arguments 5 years ago or so saying that VC start-ups would crush FICO scores unit. They didn't even dent FICO. Consumer credit scores is a really hard business (though it does seem really easy to spit out a simple number). Similarly, VC start-ups have also tried to compete with EXPD in recent years. They have generally failed to gain market share. EXPD is a pretty tech-savvy company for the industry (from what I can tell without using their services).

 

I really don't have the ability to convince you that AMZN is not a threat if you strenuously believe they are. All I know is "international customs is a really hard business to succeed in". AMZN is not omnipresent and infallible, despite what you may read in the papers.

[Sharad]

EXPD is one of the largest freight forwarding companies in the world, with a focus on air and ocean freighting for importers and exporters around the globe.

 

EXPD is a bit unique in it's corporate governance. The company has more than $1b in net cash (roughly 9% of the market cap) and they post an 8k after each quarter responding to selected inquiries from investors throughout the quarter. What's unique is the quality of disclosure and transparency for an S&P 500 company. The company has historically been realistically conservative in their guidance to investors.

https://investor.expeditors.com/financial-information/8k-q-and-a

 

The reason I think EXPD is especially compelling now is the recent tax plan and improved global freight forwarding outlook.

 

The company is the largest freight forwarder in the US and primarily competes with international companies. EXPD will be able to repatriate their their ~$500m in foreign cash to increase buybacks. In addition, EXPD guided for a FY18 effective tax rate of 31%-34%, which I think will be higher than rates in future years. I think EXPD will end up around 25% or so eventually.

 

EXPD has an operating margin of 9% - 11% historically (on gross revenue), with approximately 10% in FY17. Net revenue and net margins are generally steady and thus, proportional. In addition, some analysts expect further margin expansion towards the 11% figure. Thus, the FY17 pre-tax earnings of $720m seems like a reasonable base to project from.

 

As of 2/20/2018 $62.00 stock price):

MC: $11.0b

EV: $10.0b

 

EBT: $720m

NI (32.5%): $486m

NI (25%): $540m

 

EV/EBT: 13.9x (7.2% pre-tax yield)

EV/NI: 20.6x (32.5% tax rate)

 

EV/NI: 18.5x (25% tax rate)

 

DCF:

1. Growth of 5%

2. Assume 30% tax rate (roughly what a blend of 32.5% near-term and 25% long-term works out to)

3. discount rate of 9%

 

 

I get a value of the operations of $9.825b or $10.875b with the net cash. That works out to $61.25/share. I think growth could come in higher and margins may tick up some. The possibility of multiple expansion, given current economic conditions, seems more plausible then not. I think expected returns for EXPD are conservatively around 10% compounded right now, which isn't a bad deal imo given the risk involved here.

 

For small investors, nearly 100% of earnings are reinvested at the earnings yield of the stock due to the combination of dividends and buybacks. Net of foreign cash (~$500m mentioned above), the company has a ROE and ROIC of ~33%.

 

The best thing about EXPD is their Q&A with shareholders. Some of the answers I recall from the 2006-2009 time frame were downright hilarious (I haven't followed them recently, so I don't know if they are still writing the same way). It was the best entertainment outside of BRK's shareholder letter.

[Sharad]

To further my comment above, I present the following link with no additional comment:

 

https://www.footnoted.com/more-fun-with-filings-from-expeditors-international/

[DooDiligence]

Why won't there be pricing pressure from...you guessed it, Amazon?

 

International customs is hard.

 

I remember arguments 5 years ago or so saying that VC start-ups would crush FICO scores unit. They didn't even dent FICO. Consumer credit scores is a really hard business (though it does seem really easy to spit out a simple number). Similarly, VC start-ups have also tried to compete with EXPD in recent years. They have generally failed to gain market share. EXPD is a pretty tech-savvy company for the industry (from what I can tell without using their services).

 

I really don't have the ability to convince you that AMZN is not a threat if you strenuously believe they are. All I know is "international customs is a really hard business to succeed in". AMZN is not omnipresent and infallible, despite what you may read in the papers.

 

FedEx & UPS are very good at this.

 

I used to send 25KG boxes of jewelry from Thailand to the US (mostly with FedEx) & the customs brokerage was practically invisible (except for when I had to send a check for the duties.)

 

The freight charge on a 25KG box was somewhere around $150 insured (incredible!) and for some strange reason, they'd let you put up to 35KG in the box.

[Broeb22]

Said another way...what does the company actually do, and where is the moat?

 

 

[Guest Schwab711]

Said another way...what does the company actually do, and where is the moat?

 

You need to move a lot of something from somewhere to somewhere else. You don't know where it will come from, how much you are shipping, or where you are going. Expeditors has a solution to ensure your shipments arrive properly.

 

https://info.expeditors.com/featured/expeditors-named-the-international-partner-of-the-year-by-the-home-depot

 

Edit: I'm not sure if this is a moat but it's the easiest way I know to describe EXPD's business. All of EXPD's major competitors have similar stories. This isn't a FICO-like moat. I think EXPD's returns come from being better-to-slightly-better operational efficiency relative to peers (which leads to scale advantages), in a semi-localized market and with top-notch management.

[BPCAP]

Went to a shareholders meeting several years ago.  Management was humble and non-promotional.  They said the competition is strong and getting stronger.  Couldn’t promise their leadership would advance over time.  I appreciated the honesty.  It’s essentially a play on air freight 3PL and customs, the former having somewhat less appeal over time because electronics and computers are getting cheaper and no longer need to be airfreighted.   

 

They are like the boys from Old School: they are good at paperwork.  I am rooting for them but I put in the too hard pile. Actually went with CHRW because fresh food has a better moat, although it is lower return.

[vinod1]

I like your approach of adjusting to a higher effective tax rate. Good business but not a whole lot of pricing power. So just like you did, better not to assume that all of the lower tax rate would flow down to net income. So assuming about 7% of the tax rate reduction from 37% to 25% would be passed on to consumers makes sense.

 

The main issue with paying up for this business is that it is very difficult, if not impossible, to assess the likely growth rate. To me, it seems futile to even try to estimate growth in global trade as it is too complicated and depends on many unknowable things.

 

So if you take adjusted earnings at 30% rate, you end up with around $2.8 normalized earnings per share. So at the current price at $65 we end up paying a 23x PE multiple of last year earnings. So not seeing the attraction given the lack of confidence in growth rate. I looked at this late last year and passed it up around $59 per share.

 

Vinod