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Expeditors International of Washington: Short-term pain, long-term gain.

Opdateret: 17. feb.

Expeditors International of Washington has had some exceptional years fueled by the shipping constraints during the pandemic. Now, we are facing some economic headwinds, which are particularly challenging for a company like Expeditors International of Washington. Will a significant drop in share prices create an investment opportunity?

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Expeditors International of Washington. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I don't own any stocks in the competitors of Expeditors International of Washington either. Thus, I have no personal stake in Expeditors International of Washington. If you want to purchase shares (or fractional shares) of Expeditors International of Washington, you can do so through eToro. eToro is a highly user-friendly platform that allows you to start your investment journey with as little as $50.

Expeditors International of Washington (hereinafter referred to as Expeditors) was founded in 1979 in Seattle, Washington, United States, and conducted its initial public offering (IPO) in 1984. Expeditors operates in 346 locations across 101 countries and employs more than 19.000 people. Expeditors is a global logistics and freight forwarding company. They are a third-party logistics provider that purchases cargo space from carriers, such as airlines, ocean shipping lines, and trucking lines, on a volume basis. They then resell this space to their customers. As they purchase it in bulk, they receive a discount from carriers and can resell it to customers at a lower price than customers could obtain by purchasing directly from the carriers. Hence, they make their profits from the difference between the purchase price and the resale price. Expeditors does not own any vessels, which means they operate with a non-asset based model. Expeditors also offers customs brokerage services, which assist customers in clearing customs by preparing and filing the necessary documentation and facilitating payment of duties and other taxes on behalf of the customers. Expeditors has three operating segments: Ocean freight and ocean services, which accounted for 38% of revenue in 2022; airfreight services, which accounted for 35% of revenue in 2022; and customs brokerage and other services, which accounted for 27% of revenue in 2022. Expeditors has a global network and strong customer relationships, which give the company a moat.

Their CEO is Jeffrey S. Musser. He joined Expeditors in 1983, initially working as a part-time messenger, and has since held various positions within the company. In 2013, he was appointed as the CEO. He has extensive experience in both the industry and the company where he has worked for 40 years. When he was chosen to be CEO, it was mentioned that he has never been given an assignment where he hasn't exceeded expectations, and it was mentioned that he was exceptionally well-qualified because of his many previous roles in the company that has given him both field and global corporate leadership responsibilities. As a leader, Jeffrey S. Musser focuses on organic growth because he believes that it is closely tied to employee excellence. In contrast, acquisitions and mergers often result in significant disruptions to a company's routine operations, which can have a highly detrimental impact on employees. He also believes that organic growth results in better customer satisfaction, as mergers and acquisitions disrupt routine operations. According to Comparably, Jeffrey S. Musser has an employee rating of 77/100, which places him in the top 15% of similarly sized companies. I believe that Jeffrey S. Musser's vast experience and focus on organic growth make him the right person to lead Expeditors moving forward.

I believe that Expeditors has a moat, and I also have a positive opinion of their management. Now, let us investigate the numbers to determine if Expeditors meets our criteria for having a strong competitive advantage. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.

The first number we will investigate is the return on invested capital, also known as ROIC. I would like a 10-year history with all figures exceeding 10% for each year. Expeditors has delivered an exceptional return on invested capital (ROIC) in the past decade. ROIC has only been below 20% once, and that was ten years ago. In the last two years, ROIC has reached a new level because of the tailwinds that a company like Expeditors had during the pandemic. Thus, the return on invested capital (ROIC) from 2021 and 2022 is hardly sustainable. Nonetheless, the return on invested capital (ROIC) has consistently been high. Even if the ROIC drops from the high level in 2021 and 2022, these are still impressive numbers.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Numbers are a bit mixed but overall I believe that the numbers are encouraging. There was a slight decrease in 2018, else numbers have increased up till 2022. However, 2022 followed a very strong 2021, and the numbers in 2022 still managed to be the second highest in the past decade. Numbers will probably decrease again in 2023 but it isn't something I worry about in the long-term.

Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use margins to enhance clarity and improve understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. It is not surprising to see that Expeditors has consistently generated positive free cash flow in every year over the past decade. 2022 is definitely an outlier, and I don't expect Expeditors to be able to achieve numbers in that range in the future. Levered free cash flow may seem low, but it is normal for the sector. Free cash flow yield has been relatively consistent, but it reached its lowest point in 2021. It will be interesting to see how much free cash flow Expeditors delivers in 2023 compared to the pre-pandemic levels.

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. After performing the calculation on Expeditors, I found that the company has no debt. I like companies that are debt-free, so it is very encouraging to see.

Based on my findings thus far, I believe that Expeditors is an intriguing company. However, no investment is without risk, and Expeditors also has its fair share of risks. One risk is macroeconomics. Fewer products are being shipped when economies are facing headwinds, as companies will need to sell their existing inventory before ordering new products. Thus, as volume decreases, so do shipping rates. Furthermore, Expeditors customs brokerage and other services segment is generating its revenue through filling required documentation and providing payments of duties and other taxes for customers. As volume declines, there will be fewer documents to fill out and fewer products to pay taxes on. A post-pandemic world. The pandemic seem far away but the post-pandemic world now affects the financials of Expeditors as people are spending more money on services rather than products, and services cannot be shipped. Another disadvantage for Expeditors is that people start travelling again, which results on more flights. As flights increases, so does airfreight capacity, and as capacity increases without an increase in demand, prices drop, which hurt the profits of Expeditors. Competition. In their annual report, Expeditors mentions that the global logistics services industry is highly competitive and is expected to remain so in the future. Certain air and ocean carriers are entering onshore services as they pursue more profitable and less commoditized market segments, while new technology based competitors have entered the market with substantial capital funding. Thus, Expeditors is facing new competition in the future.

There are also numerous reasons to invest in Expeditors. One reason is that macroeconomics will eventually improve. The shipping industry is cyclical. Thus, while the current microeconomic factors is currently causing headwinds for Expeditors they won't last forever. The management has previously stated that they are preparing themselves for the future when operating conditions eventually stabilize and demand and volumes begin to recover and grow. Hence, management doesn't seem concerned about the long-term. If these short-term headwinds push the stock price down, it may be possible for long-term investors to buy stocks at a discounted price. Forward-looking opportunities. Expeditors keeps evolving as a business and has invested in several forward-looking opportunities that will make it a stronger company moving forward. One is Onyx Strategic Insights, which provides geopolitical and macroeconomic forecasts for the year. Another is the new Delivery Management solution that assists customers with the complicated process of delivering containers and arranging for empty containers to be returned. Management believe that these forward looking opportunities will strengthen the customer relationship, which is part of what gives Expeditors its moat. Dividends and buybacks. Expeditors has been very shareholder-friendly when it comes to dividends and share buybacks. The dividend yield is currently relatively low at 1,2%. However, over the last 10 years, Expeditors has had an annual dividend growth rate of approximately 9%. Expeditors has also bought back plenty of shares. Last year, Expeditors bought back 6% of their outstanding shares, and over the past ten years, the number of shares outstanding has decreased by more than 22%.

Now it is time to calculate the price of shares in Expeditors. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 4,5, which is 45% lower than the EPS in 2022.. I have selected a projected future EPS growth rate of 5% (Allianz expects the shipping industry to grow by 1-2% in 2023, followed by 5-6% in 2024 as I have already lowered EPS, I go with 6%). Additionally, I have chosen a projected future P/E ratio of 10, which is twice the growth rate. This decision is based on the fact that Expeditors has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $23,90. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Expeditors at a price of $11,95 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 1.862 and capital expenditures were 55. I attempted to review their annual report to determine the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated for maintenance purposes. This means that we will use 39 in our calculations. The tax provision was 372. We have 147,222 outstanding shares. Hence, the calculation will be as follows: (1.862 – 39 + 372) / 147,222 x 10 = $149,09 in Ten Cap price. However, this calculations is based on a very strong 2022. Operating income decreased by 51% in the first six months of 2023. Thus, I would divide the Ten Cap price by 2 to get a more realistic price, which means the Ten Cap price will be $74,55.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. Expeditor delivered a free cash flow per share of $12,84 in 2022, which is significantly higher than the average figure. Thus, I will calculate the Payback Time price using Expeditors' Free Cash Flow Per Share of $4,50 (which is higher than pre-pandemic) and a growth rate of 5%. If you want to recoup your investment in 8 years, the Payback Time price would be is $47,21.

I believe that Expeditors is an intriguing company, and I also have confidence in its management. Expeditors has achieved impressive results over the past two years, but it is currently encountering short-term challenges as a result of economic headwinds. We also see an increase in cargo capacity, which means that Expeditors is being hit by a double whammy. Nonetheless, I believe that these challenges are short-term and part of the cyclical nature of the industry in which Expeditors operates. Competition is a long-term risk for Expeditors as the company is facing new competitors in both traditional air and ocean carriers, as well as new technology-based competitors. However, I believe that Expeditors will do great against competition as they are developing new products in order to continue delivering high customer satisfaction. It is difficult to value Expeditors because of their fantastic performance in the last two years, and I may have been too conservative in my calculations. Nonetheless, I will not be investing in Expeditors now because I believe the economic headwinds will persist for a bit longer. However, I love a high ROIC (Return on Invested Capital) business like Expeditors, and if the share price reaches the adjusted Ten Cap price of $74,55, I may consider opening a small position.

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