Logistics Company Offers Long-Range Appeal

The WSJ‘s Heard on the Street column looks at Expeditors International (EXPD):

Shares of Expeditors International of Washington Inc. might be a “momentum” investor’s trash in the coming weeks, but the logistics company’s stock is likely a long-term investor’s treasure.
Expeditors primarily buys air- and ocean-freight space at wholesale prices and resells it to commercial customers who need shipping services to and from Asia, the U.S. and Europe. The Seattle company, founded in 1979, has been a standout performer in this increasingly lucrative niche. By consolidating customers’ shipments and offering customs brokerage to speed delivery, the company has built an enviable book of steady clients.
But the company’s stock price — which has nearly tripled over the past five years — is off almost 30% since the end of June, according to Thomson Financial. The fall has happened despite second-quarter net income that was up more than 50% from a year earlier. As of 4 p.m. Friday in Nasdaq Stock Market composite trading, Expeditors’ shares fell 55 cents, or 1.4%, to $39.26, giving the company a market capitalization of $8.4 billion.
This recent tumble might be because the shares had attracted quick-trigger momentum investors who worry that a slowing economy could temporarily depress freight volumes. Stock analysts, who project 18% annual earnings growth over the next five years, have gotten skittish, too, as the stock’s price/earnings ratio has risen to more costly levels. The stock is rated a “hold” by 11 of the 13 analysts who cover it. The other two have “buy” and “outperform” ratings, according to Reuters Estimates.
Despite what might be a bit of a blue period, many investors say shareholders reading short-term economic tea leaves or worrying about today’s valuation might deserve the designation of cynic as defined by Oscar Wilde — someone “who knows the price of everything and the value of nothing.”
“The stock has been volatile lately, and that’s probably an indication of its owners and not the company’s results,” says Joe Fath, a senior stock analyst who covers the company at T. Rowe Price Group Inc., which owned 682,000 shares on June 30, according to regulatory filings.
“The market has become very short-term focused, and it can create an opportunity here for long-term investors,” says Ed Han, manager of the $143.9 million Transamerica Premier Growth Opportunities Fund, in which Expeditors was the top holding on June 30.
Bulls admit that recent pressure on the stock is understandable. The increasing number of professional investors concerned with quarterly or even monthly returns will likely dump shares of any company in the logistics or transportation sector because of economic worries.
The company’s enviable profit-growth track record has translated into a perennially high price/earnings ratio, and stocks with rich per-share multiples often are sold first when investors get antsy. Today, the company’s shares trade at a little more than 30 times their expected earnings for 2007, which is almost double the P/E ratio of the average stock in the Standard & Poor’s 500-stock index. That also is higher than the valuations of competitors such as CH Robinson Worldwide Inc., UTI Worldwide Inc. and EGL Inc. Yet, over the past decade, the stock has averaged an annual gain of 35%.
Beneath a high valuation, bulls say, is a company that has consistently, if quietly, churned out above-average profit without needing heavy investment or acquisitions. Further, they say the company should continue to do so through market-share gains and industry growth in a sector where demand should track with powerful outsourcing and globalization trends.
“They are simply the best at executing in a business benefiting from global trends whose growth is pretty much inexorable,” says Ken Broad, who has followed the company at different firms for a decade and owns shares in the $428.8 million Delaware Select Growth Fund he manages. He adds that Expeditors is one of only two stocks in his personal portfolio.
Why so smitten?
One reason is the basic appeal of this type of logistics business. Even big retailers, manufacturers and technology companies that ship products world-wide every day aren’t experts at international supply-chain management. With more companies’ outsourcing work to lower-cost markets and using “just-in-time” inventory management to avoid having big stockpiles of goods, getting materials to distant spots and through customs on time is increasingly important.
A big chunk of Expeditors employees’ pay is pegged directly to the amount of profitable business they bring in. And without expensive factories or equipment to replace and repair, more of every dollar in revenue gets to the bottom line, and the company doesn’t have a penny of long-term debt.
This combination has led to ample free-cash flow that the company has used to repurchase shares, buy real estate in important gateway cities and build its book of business. The company’s return on equity and return on capital have averaged well above 20% over the past decade, according to researcher Capital IQ. The company has raised the amount it pays out in dividends each year for more than a decade.
To be sure, those expecting the company and its stock to grow at or above its historically high clip likely will be disappointed. The company’s growth likely would be pinched in an extended economic downturn. The business could be hurt if its stock enters a prolonged downturn because stock options are a significant carrot in its performance-based pay structure.
At the same time, a business that sells expertise at healthy rates, has no debt and has a growing market is the kind of business that makes patient investors lick their chops — even if the road seems a bit bumpy in the near term.

Posted by on September 11th, 2006 at 10:01 am


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