With Quiver Quantitative’s recent institutional holdings data, we can see that hedge funds and asset managers have been increasing their holdings in Expeditors International of Washington Inc. (NASDAQ: EXPD). Firms such as Wellington Management, Millennium Management, and JP Morgan Chase have all added to their EXPD positions recently. Most notably, Wellington Management increased shares held by 2.22% (as filed on 6/30), bringing their total EXPD holdings to 2,562,398 shares worth nearly $300 million dollars at current market prices. With this in mind, we took a closer look at some of the reasons why many investors may be bullish on Expeditors International of Washington.
In August, Expeditors International of Washington reported second quarter earnings results for fiscal year 2023. The business reported diluted EPS of $1.30 a share for the second quarter, a 43% YoY decrease. Revenues decreased 51% YoY to $2.2 billion dollars in the second quarter, with operating income decreasing 51% YoY to $248 million dollars. Additionally, air freight tonnage volume and ocean container volume fell 15% and 13% YoY, respectively. While at first glance this may seem like terrible earnings, this earnings decrease YoY can largely be attributed to weakness in the freight marketplace, which has reverted back near pre-pandemic levels as global supply chain congestion has largely cleared up since 2021. However, on a more positive note, this business displayed superb capital allocation priorities, returning over $1 billion dollars to shareholders via dividends and share repurchases in the first six months of 2023. Within the last 12 months, management has returned over $2.1 billion dollars to shareholders via share repurchases and dividends. With this earnings result in mind, we believe that Expeditors International of Washington is currently a compelling investment opportunity trading at a very fair valuation, largely due to a tough freight environment for the time being.
Expeditors International of Washington Inc. is a global provider of logistics services, offering customers a seamless international network of people and integrated information systems to support the strategic positioning and movement of goods. As a third-party logistics provider, the business makes money by purchasing cargo space from carriers (airlines, trucking lines, ocean shipping lines) based on volume and reselling that space to customers. With this business model, the business does not own any ships, trucks, or planes (making it a capital-light business). The business provides a suite of transportation services and customer solutions, including order management, time-definite transportation, warehousing and distribution, cargo insurance, customers brokerage, and other customized logistics services, among others. In 2022, the business’ revenue split was 38% of revenue towards ocean freight and services, 35% of revenue towards airfreight services, 27% of revenue towards customs brokerage and other services.
Expeditors International of Washington operates within the global global logistics services industry, a highly competitive industry that management believes will be so for the foreseeable future. There are a large number of companies operating within one or two segments within the industry, however, a lesser number operate with a global network of a full complement of logistics services, like Expeditors does. While regional and local competitors have strong presences in certain markets, management acknowledges that consolidation in the global logistics services industry will continue to happen as larger firms strive to offer a full suite of logistics services and a large international service network. Management acknowledges that competitive factors within this industry include price and quality of service, expertise, convenience and scope of operations, and responsiveness. Management believes that the business’ prices are competitive, and the business’ emphasis on quality customer service and strong commitment to compliance make them competitive in this industry.
Management is solid, and their capital allocation priorities do a good job of aligning shareholder and management interests. Management likes to aggressively repurchase shares to reward shareholders. Share repurchases have been a long standing tradition for the business. In 2001, the Board of Directors authorized a share repurchase plan that at the time authorized the repurchase of outstanding common shares to 200 million shares outstanding. This authorization (which has no expiration date) has been increased from time to time, with the Board of Directors last authorizing repurchases of common stock from 150 million to 140 million shares outstanding in February of 2023. In addition to these aggressive share repurchases, Expeditors also likes to return value to shareholders via cash dividends. In 2022 alone, Expeditors returned nearly $1.8 billion dollars to shareholders via repurchases and dividends. We believe the best business and management teams are ones that make shareholders feel like partners in the business, and we believe that Expeditors is a great example of this. The business’ capital allocation priorities do a great job of creating shareholder value, massively benefiting their shareholders.
In terms of management incentives, management is incentivized well, with a compensation structure that does a good job of aligning shareholder and management interests. Some highlights of the management / NEO compensation structure include a minimum 5% growth in operating income for senior managers to earn an unreduced incentive plan payout, pay for performance (85% of NEO compensation is ‘at risk’ and tied to performance), no guaranteed bonuses, and a clawback policy for incentive compensation. A large majority of NEO compensation is in the form of RSUs (restricted stock units) and PSUs (performance-based stock units), with more and more total compensation being moved to equity payouts within the last few years. This is a green flag as an investor, as it does a great job of aligning shareholder and management interests. When management builds equity in the business (especially when a large percentage of their compensation is in the form of equity rewards), they are incentivized to ensure that shares perform well, along with the business. This ties management closer to the shareholder, a very important factor to consider when investing into a business. Management runs and controls your investment, so you better ensure that management is competent and incentivized well to perform.
Expeditors International of Washington is a very efficient business. The business operates at a LTM ROE of 34.5% and a LTM ROIC of 44%. With a WACC of 10.1%, Expeditors International of Washington operates at a ROIC to WACC ratio of 4.36x, showcasing the business’ ability to generate returns on cash reinvested back into the business at rates of return far higher than its weighted average cost of capital. Businesses that are able to efficiently reinvest capital back into the business are considered to be compounders, businesses that are able to rapidly compound intrinsic value over the long-term. Looking further at efficiency metrics, we can see that ROIC has expanded over time, possibly showing that the business now holds a stronger competitive advantage or moat within the industry that it operates in. In 2013, the business operated at a ROIC of 25.7%, compared to today where the business operates at a LTM ROIC of 44%.
Analyzing Expeditors International of Washington’s income statement, we can see some stellar sustained growth in revenue, gross profit, and earnings within the last decade. From 2013 to 2022, Expeditors International of Washington grew revenue at a CAGR of around 10.9%, with gross profit growing at a CAGR of 11.7% in that same time frame. This growth in gross profit can largely be attributed to incrementally expanding gross margins. In 2013, the business operated at a gross margin of 12.4%, compared to today where the business operates at a LTM gross margin of 13.9%. In terms of earnings, Expeditors International of Washington has grown EBITDA at a CAGR of 12.5% from 2013 to 2022, with EPS growing at a CAGR of 17.3% in that same time frame. This growth in EPS can largely be attributed to share repurchases. Expeditors International of Washington is a cannibal, decreasing shares outstanding by 27% since 2013.
Looking at Expeditors International of Washington’s balance sheet, we can see that the business operates in strong financial health. The business currently holds around $1.7 billion dollars worth of cash and equivalents on hand, with no long-term debt or short term borrowings. With a net debt of -$1.17 billion dollars (meaning that the business has excess cash of $1.17 billion dollars compared to debt), the business has plenty of runway to pay off their debt obligations. Adding credence to this point, the business operates at an interest coverage ratio of 52.73x, meaning that the business generates $52.73 dollars worth of EBIT for every dollar of interest expenses that the business incurs. Additionally, with over a billion dollars of excess cash on the balance sheet, the business has ample opportunity to reinvest cash back into the business, repurchase shares, or offer / increase a dividend, handsomely benefiting shareholders.
Looking at Expeditors International of Washington’s cash flow statement, we can see some stellar sustained growth in net income and free cash flow within the last decade, showcasing the business’ increased operational efficiency. From 2013 to 2022, the business grew net income at a CAGR of 14.6%, with free cash flow growing at a CAGR of 19.2% in that same time frame. This growth in free cash flow can largely be attributed to expanding free cash flow margins. In 2013, the business operated at a free cash flow margin of 5.8% of revenue, compared to today where the business operates at a free cash flow margin of 14.3% of revenue. If the business is able to continue to expand free cash flow margins, they will be able to generate more and more free cash flow from revenue. With increasing piles of free cash flow being generated, the business has an increased runway to reinvest cash back into the business, repurchase shares, or offer / increase a dividend, benefiting shareholders.
After conducting a reverse discounted cash flow analysis, we can see that Expeditors International of Washington is trading at share prices that imply a -3.54% growth rate (CAGR) in free cash flow over the next ten years, using a perpetuity growth rate of 3% (largely in line with US GDP growth) and a discount rate of 10%. Expeditors International of Washington is a superb business, and we believe that this growth rate in free cash flow is ludicrous. Assuming a 5% growth rate in free cash flow over the next ten years (which is a very conservative estimate based on expanding free cash flow margins and free cash flow growth within the last decade), that brings us to an intrinsic value of around $200 dollars, implying a 71% return on investment. While this valuation is very cheap, it makes sense at this time. The freight industry has had a fall-off since 2021, when post-pandemic consumer spending caused freight volumes to soar and a congested global supply chain caused freight prices to rise, allowing businesses like Expeditors to benefit handsomely. While in the short-term the business is undervalued due to a poor freight market, we see long-term tailwinds from increased consumer spending massively benefiting the business. As the global economy begins to come out of it’s inflationary post-Covid state and consumer spending starts to rebound, we believe that Expeditors International of Washington will benefit from industry tailwinds, making a 5% growth rate in free cash flow over the next ten years very attainable in our eyes.
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