Expeditors: Trade Fear Creates Long-Term Opportunity

John B. Rogers profile picture
John B. Rogers
91 Followers

Summary

  • Long-term growth in global trade will continue despite recent surge in protectionism.
  • Consistent growth and high returns on capital positions company as attractive long-term holding.
  • Recent dip creates opportunity for investors.

The best opportunities in the market often appear when the headlines are most unnerving. While sometimes the market concerns are warranted, remember the market is driven by a lot of professionals with experience and resources, price dips also can provide buying opportunities.

The best stock investments for the long-term are with companies which can grow and generate high returns on capital. Occasionally negative headlines or investor concerns provide opportunities to buy good stocks at lower prices. Sometimes we get both.

The shares of Expeditors International of Washington, Inc. (NASDAQ:EXPD) currently appear to offer this type of of opportunity. The company has among the most impressive long-term track records for growth and shareholder returns, dating back over 25 years. Amidst the current political turmoil and protectionist sentiment out of the White House, investors have become concerned about the outlook for the business despite one of the best track records and the prospects for long-term industry growth.

The airfreight and logistics sector of the market has lagged over the past year due to concerns over slowing global trade prospects as well as increased competition among aircraft and ship owners. While Expeditors is now immune from these headwinds, the company is much better positioned than most other market participants.

Record of success built on differentiated model

Expeditors International of Washington provides customers with freight forwarding services to customers on a global basis. These services include the management of shipments from manufacturers to export terminals to transportation to final destination, optimizing routing while providing tracking, filing of government paperwork, customs and other support services.

A video from the company's website provides a basic synopsis of the company's business: What-is-cargo-movement?

Expeditors operates with a somewhat unique model. The company can support multiple aspects of customer's supply chain logistics from order management, time-definite transportation, warehousing and distribution, insurance, tracking and other services as well as customized freight handling for specialized cargo. The company does not own aircraft or ships but rather purchases cargo space from carriers (including airlines and ocean shipping lines) on a volume basis and resells the space to customers. The company provides ongoing relationships with larger importers/exporters and does not compete for overnight courier or small parcel business. Offices are spread around the world to support customers globally.

Most other freight logistics companies can not offer the global reach nor the common systems Expeditors can.

Long-term record distinguishes company

Expeditors has generated long-term average annual EPS growth of 10%, including net income growth and benefits of share repurchases. Notably the company has derived these gains with minimal financial leverage and through reliance on organic growth.

ChartData by YCharts

Other competitors have had to rely on acquisitions and/or financial leverage to match Expeditors, which is typically a less sustainable strategy for growth.

Operating returns are well above peers.

With a focus on International trade markets and without major capital investments, Expeditors can operate much more flexibly and be responsive to customers evolving needs. This strategy has also boosted returns for the company above larger freight companies. Most of these other freight companies, including UPS (UPS), FedEx (FDX) and C.H. Robinson (CHRW), operate with a much more asset intensive model, including ownership of fleets of equipment and/or depend on acquisitions to drive growth. While smaller logistics companies are focused on fewer markets and do offer the scale reach customers increasingly utilize.

ChartData by YCharts

Beyond near-term headline risk, target market offers notable growth potential

With the prospect of lower near-term international trade activity between two of the largest economies, China and the the US, investors expect slower growth. However we tend to view international trade as long-term growth trend driven by increased specialization, lower freight costs and increased communication. Furthermore a near-term impediment to exports from China will encourage many importers to find and develop new trade sources, which will require increasingly complex logistics.

Beyond the current political gyrations out of Washington, we look for long-term growth in international trade, particularly for manufactured goods. Countries need access to global trade to access new technology and capitalize on low cost production. Nations actively participating in global trade realize faster economic growth, while isolated ones are left behind in terms of development and economic growth.

International Trade and Growth

Growth in global merchandise trade has and is expected to grow more quickly than overall economic growth providing logistic firms like Expeditors a favorable tailwind.

Trade Growth

Ongoing negotiations between the US and trading partners, particularly China, will undoubtedly create risk for the near-term market prospects. However, we see the long-term trend for growth to continue, which will create new opportunities for international freight logistics companies.

Current valuation provides investors with opportunity

While the share of EXPD do not clearly follow into the deep value category with a 20X P/E based on current 2019 EPS consensus forecast of $3.50 per share, relatively flat with 2018. Analysts appear concerned about the prospects for reduced trade activity over the near term. However, we would note the shares are now trading below historical valuation norms for the company.

ChartData by YCharts

We view the current price of Expeditors as an attractive entry point. A resumption of growth beyond 2019 back towards historical norms should boost earnings prospects above $4 per share. With a return towards historical valuation norms, the share price could reach the mid 90's over the next 12 months and much higher over the long-term. Of course a more restrictive near-term trade environment could also defer earnings growth, but we see long-term trade activity growing as current and future politicians realize the greater benefits. Alternatively, the shares could substantially benefit from any breakthrough in trade negotiations.

Expeditors shares offers investors ownership in a well-managed, lower-risk company with a long-term global growth trend.

This article was written by

John B. Rogers profile picture
91 Followers
Independent consultant working with institutional investors, public companies and others. Prior experience includes 30+ years as a sell-side Analyst and Director of Research.
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Disclosure: I am/we are long EXPD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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