Profits to Rise +20% a Year at Expeditors International

I ran across Expeditors International of Washington (EXPD) recently while screening for companies with superior returns on equity [ROE]. The firm's name might not be the catchiest, but its business model sure stands out.

The company is a leader in the non-asset-based freight business. In English, that means that it arranges to have goods transported, but doesn't actually own the planes, railroads, trucks, or ships that move those products. Essentially, it acts as a middleman, reserving cargo space on someone else's fleet and then filling that space with its customers' merchandise.

The first question you might ask is why those customers can't simply bypass the middleman and work directly with the shippers. The most obvious answer is that Expeditors International deals in huge volumes and can arrange sharply discounted shipping rates, and those savings are then passed on to its clients. By dealing with an experienced logistics expert, those same clients also avoid common headaches that arise from overseas shipping -- letting someone else worry about hassles like clearing customs and paying tariffs.

Driven in part by surging demand for raw materials in Asia, international trade has been booming -- leading to eye-popping triple-digit gains for many dry-bulk shipping firms. Expeditors is cashing in on this same trend, but without having to make costly capital expenditures to buy and maintain a fleet of its own. As a result, returns on invested capital [ROIC] stand at a stellar 23%, nearly double the S&P 500 average of 12%.

Over the last three years, earnings have nearly doubled from $122 million to $235 million per year, and analysts are expecting profits to continue rising at a rapid +19% pace for the foreseeable future.

EXPD shares have risen 10-fold over the past decade and currently trade at generous earnings multiples. However, the company has also grown by leaps and bounds, is steadily picking up market share, sports the highest margins in its business, and is the recipient of booming global trade. It deserves to trade at a premium.

However, with a fair value of $51, the stock doesn't currently offer the type of upside potential that would warrant serious consideration just yet. Still, given its attractive business model and entrenched position in the lucrative North America to Asia trade corridor, it's certainly worth watching.

Disclosure: Author has no position.