UTi Worldwide Flying High Amid Global Slowdown

On Thursday, September 4 pre-market, UTi Worldwide (UTIW) reported Q2 earnings of $0.33 per share or $33.7 million on $1.26 billion in revenue vs. $0.28 per share or $27.7 million on $1.04 billion in revenue (see conference call transcript). Excluding the sale of its art packing business representing a gain of $5.3 million, UTIW earned $0.28 per share. Analysts were expecting $0.27 per share on $1.24 in revenue, beating both earnings estimates and revenue targets.

Operating expenses increased 16% to $372.4 million vs. a year ago. However, the rate slowed down on UTIW’s cost restructuring plan. I believe that the plan will be successful, but also believe that that revenue growth will grow at a modest rate. Operating margins should widen due to the plan, which would be partially offset by fuel surcharges.

The global economic slowdown is having an impact on the demand for ocean and air freight forwarding, but I expect UTIW to outpace its competitors due to well-diversified sources of revenue. As of fiscal 2008, 33% of revenue came from the Americas, 26% from Europe, 26% from Asia, and 15% from Africa (mainly South Africa). Revenue by unit came 38% from air freight forwarding, 25% from ocean freight, 14% from contract logistics, 12% from distribution, and 11% from customs brokerage and smaller units. A future drop in shipping volume and unfavorable currency fluctuations add to the risk for UTIW.

As UTIW manages its current acquisitions, don’t expect too many for fiscal 2009. In 2008, UTIW acquired Chronic Solutions, all of UTIW’s South American subsidiary, Co-Ordinated Investment Holdings, and 75% of Newlog Ltd.

The industry outlook is neutral as I believe that much of the global slowdown has been priced in. Customers are resorting to cheaper delivery methods as fuel surcharges increase, which should be offset by higher shipping volume from China and the rest of Asia in the next few years giving the industry ample room to pass on price increases.

Currently, 10 firms publish recommendations for UTIW with 5 “Buy” ratings, 4 “Hold” ratings, and 1 “Sell” rating. There have not been any new or reiterated ratings as of August 21 so expect some to come in the near future. From June to September, CEO Roger MacFarlane purchased over 1 million shares totaling with a combined value (at time of purchase) of $20.8 million.

Technically, UTIW is consolidating after a breakout/gap up and is firmly supported by the 200-day MA. The only questionable action is the average volume on the breakout at the end of July. I wanted to see volume of at least 2 million shares or more to accompany the gap up. Regardless, UTIW may be in the process of making a higher low and is considered a ‘cautious buy’.

Disclosure: none