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 this lead to a drop in share prices, creating an investment opportunity for the long term? It is what I am going to investigate in this analysis.
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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.
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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 18.000 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. By purchasing 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 provides customs brokerage services, which help customers clear customs by preparing and filing the required documentation, as well as facilitating the payment of duties and other taxes on behalf of the customers. Expeditors has three operating segments: Customs brokerage and other services accounted for 40% of revenue in 2023, airfreight services accounted for 35% of revenue in 2022, and ocean freight and ocean services accounted for 25% of revenue in 2023. Expeditors has a global network and strong customer relationships, which give the company a moat.
The 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 noted that he had never been given an assignment where he didn't exceed expectations. He was considered exceptionally well-qualified due to his numerous previous roles in the company, which had provided him with 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 positions him in the top 15% of companies of similar size. I believe that Jeffrey S. Musser's extensive experience and emphasis on organic growth make him the ideal candidate to lead Expeditors into the future.
I believe that Expeditors has a moat, and I also have a favorable 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 represent, you can refer to "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 not been below 20% in the past ten years, which is impressive. Expeditors achieved its highest Return on Invested Capital (ROIC) in 2021 and 2022, attributed to the favorable conditions following the pandemic. These numbers were hardly sustainable, as evidenced in 2023, which was affected by various macroeconomic factors. However, Expeditors still managed to deliver a higher Return on Invested Capital (ROIC) in 2023 compared to all years before 2021, which is encouraging. Overall, I believe that the consistently high numbers that Expeditors delivers are encouraging.
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 figures are encouraging. There was a slight decrease in 2018; however, the numbers have increased continuously up to 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 decreased significantly in 2023 due to macroeconomic factors but are still higher than the pre-pandemic levels. Hopefully, Expeditors will deliver another increase in equity in 2024.
Finally, we will analyze 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. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected 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 every year over the past decade. Expeditors delivered its highest free cash flow in 2022. Although it decreased in 2023, it remains higher than in any year before 2022, which is impressive considering the macroeconomic factors in 2023. Levered free cash flow margin may seem low, but it is normal for the sector. It is encouraging that Expeditors has delivered its highest numbers in the past two years. Free cash flow yield has been relatively consistent until 2022 but decreased in 2023. However, the free cash flow yield in 2023 is still above the ten-year average, indicating that Expeditors are not trading at high valuations. We will revisit that later in the analysis.
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.
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Based on my findings so 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. During economic downturns, fewer products are being shipped because companies must first sell their existing inventory before placing new orders. As volume decreases, shipping rates also decrease. Furthermore, Expeditors' customs brokerage and other services segment generates revenue by completing necessary documentation and processing duty and tax payments for customers. As volume declines, there will be fewer documents to fill out and fewer products to pay taxes on. Management has mentioned that these macroeconomic factors affected the 2023 numbers, as volumes of cargo declined because companies reduced inventories to more closely reflect demand. A Post-Pandemic World. The pandemic may seem far away, but the post-pandemic world is now impacting Expeditors' finances. People are now spending more money on services rather than products, and services cannot be shipped. Another disadvantage for Expeditors is that as people start traveling again, there will be more flights. As flights increase, so does airfreight capacity. If capacity increases without a corresponding rise in demand, prices drop, which can negatively impact the profits of Expeditors. Management mentioned that the numbers in 2023 were also affected by the increase in air cargo space supply due to passenger demand. This led to Expeditors experiencing a rise in the utilization of air cargo for shipping e-commerce shipments. 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 expanding their services to include onshore operations to target more profitable and less commoditized market segments. Additionally, new technology-based competitors have entered the market with significant capital funding. Thus, Expeditors will face 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 are currently causing headwinds for Expeditors, they won't last forever. The management has previously stated that they are preparing for the future when operating conditions 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 and reap the benefits once macroeconomics improve. Forward-looking opportunities. Expeditors continues to evolve as a business and has invested in several forward-looking opportunities that will strengthen the company in the future. One of them is Onyx Strategic Insights, which offers geopolitical and macroeconomic forecasts for the year. Another new solution is the Delivery Management system, which helps customers navigate the complex process of container delivery and facilitates the return of empty containers. Management believes that these forward-looking opportunities will strengthen the customer relationship, which is part of what gives Expeditors its competitive advantage. Furthermore, Expeditors has implemented a team to work on artificial intelligence. This team focuses on the utilization of AI and how Expeditors use it as a tool to enhance the productivity of their employees, which could be advantageous for Expeditors in the future. 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%. Over the last 10 years, Expeditors has maintained an annual dividend growth rate of approximately 9%. Expeditors has also repurchased a significant number of shares. Last year, Expeditors bought back 6,8% of their outstanding shares, following a 6% buyback in 2022. Over the past ten years, the number of shares outstanding has decreased by more than 25%.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
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 5,01, which is from the year 2023. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 7,3% in the next five years, but I'm more optimistic. Additionally, I have selected a projected future P/E ratio of 16, which is double the growth rate. This decision is based on Expeditors' historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $42,78. 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 $21,39 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.053, and capital expenditures were 39. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 27 in our calculations. The tax provision was 263. We have 143,866 outstanding shares. Hence, the calculation will be as follows: (1.053 – 27+ 263) / 143,866 x 10 = $89,59 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Expeditors' free cash flow per share at $6,97 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $80,07.
I believe that Expeditors is an intriguing company, and I also have confidence in its management. Expeditors has achieved impressive results in 2021 and 2022, but it is currently facing short-term challenges due to macroeconomic factors. We also observe an increase in cargo capacity, both in air cargo as discussed in this analysis, and in ocean cargo space due to the addition of new vessels. It means that Expeditors is being hit by a double whammy of reduced demand and increased supply. 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 technology-based competitors. However, I believe that Expeditors will perform well against competitors because they are developing new products to maintain high customer satisfaction. Macroeconomics will eventually improve, which will boost demand for products. Once it does, Expeditors will benefit. The question is how long it will take and how low the share price will drop. I like that Expeditors is buying back shares at a significant rate. This is evident from the fact that they have repurchased 6% or more of outstanding shares each year in the past two years, and have bought back over 25% of their shares in the last decade. Personally, I believe that the macroeconomic headwinds will persist for a longer period, so I am not in a hurry to purchase shares. Nonetheless, I believe that having a long-term mindset, purchasing shares below the Payback Time price of $80 could be a good entry point, as it represents a 50% discount on intrinsic value in two out of my three calculations.
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