A Textbook Investment Opportunity
May 24th 2012 2:16PM
Updated May 24th 2012 2:32PM
This article is part of our Rising Star Portfolios series.
It's not often that I get a good chance to buy shares of one of my favorite companies, so I'm pretty excited about today's opportunity, Expeditors International of Washington (NAS: EXPD) .
That's a mouthful to say, but what it does is easy to grasp. Simply put, it expedites international shipping. It's a freight-forwarder, which means it takes shipments from many customers in one part of the world that need to go to another part, bundles them into large blocks, arranges for transport by air or sea, clears the shipments through customs, and breaks the blocks apart before delivering the individual parts to their intended recipients.
By bundling shipments together, it gets lower rates from the air or ocean carriers, which means it's cheaper for its customers to ship using Expeditors' help than it is to ship on their own. Plus, the customer doesn't have to handle all the customs documentation, which often requires special knowledge. (Believe me, you don't want to fill out customs documentation if you don't have to -- I've had to, and I'd much rather let an expert like Expeditors handle it.)
I've long been a fan of this company for many reasons, but the biggest one is its senior management and culture. CEO Pete Rose (not the baseball player) has led Expeditors since 1988, and he has always put customers first, employees second, shareholders third, and Wall Street eighth (out of four).
Part of the culture is that it answers questions from analysts via SEC filings. Reading these is a pleasure, as management rarely hides its opinions about some questions. Here's one example from last summer, when the company was asked to "please describe any material strategic and operational mistakes the management has made in the last five years including opportunities missed":
Other than possibly answering this question, nothing really material pops to mind that we think we would have done any differently. On the other hand, we can think of several experientially vindicating decisions we were criticized for not making (not trying to grow through acquisitions and not doing layoffs in 2008-2009 obviously chief among them) that turned out to be operationally, financially AND strategically "spot-on." Despite having been severely chided by numerous of the pundits who promulgate the so-called "conventional wisdom of Wall Street" (which in our opinion, probably not surprisingly, is an oxymoron), we are most grateful that we didn't step into either of these and track them through the proverbial corporate living room stuck to the soles of our shoes.
My colleague Bill Mann highlighted another, much more explicit, example in this article.
These also give insight into the workings of the business and the culture of the company. Plus, there's often a bonus, such as the company's view on financial engineering, which is so near and dear to many other companies' hearts. (Read the answer about repatriating cash in this filing -- question No. 2.)
Expeditors is obviously not the only freight-forwarding company. But it stacks up well against the competition, as this table demonstrates.
|Expeditors||$6.2 billion||$618 million (10%)||13,590||410 in 60 countries|
|United Parcel Service* (NYS: UPS)||$9.1 billion||$607 million (6.6%)||N/A||195 countries|
|FedEx* (NYS: FDX)||$838 million||N/A||4,000||106 service locations|
|UTi Worldwide (NAS: UTIW)||$4.9 billion||$129 million (2.6%)||21,077||544 in 142 countries|
Source: S&P Capital IQ; company SEC filings. Data for the last full fiscal year. *Division or segment numbers only.
As you can see, Expeditors is a better operator than its competitors, partly because it's asset-light (whereas UPS and FedEx own a bunch of planes). And notice how much more revenue and profit it generates with fewer people.
This company is normally pretty expensive when measured by ratios such as P/E. In fact, for most of the past dozen years, it has traded at P/E multiples in the 30s and 40s. Right now it's in the low 20s.
As you might guess, concerns about global shipping are what have caused the price to drop since April. The company lowered earnings guidance, saying in part: "We've been saying for over six months now that things in the global economy just didn't seem to us to be as encouraging as a lot of the pundits were projecting. Our preliminary data seems to reveal a trend where existing customers, particularly airfreight customers, are shipping at lower volumes than we experienced during the 2011 first quarter."
Expeditors isn't the only one. UTi CEO Eric Kirchner said in that company's latest earnings release: "As we look ahead, it is difficult to predict how the global economy and world trade will perform this year. It is likely that volumes will remain soft in the first half of the year, with the possibility of modest growth in the second half."
During any economic slowdown, the company would certainly take a hit and experience lower -- even negative -- growth, just as it did during the last recession. The expectation for that seems to be priced into the stock right now, though the price could move lower if it actually comes to pass.
However, just as it did after the last recession, I expect Expeditors would come roaring back, in large part because of its culture. During the last recession, for instance, it didn't lay off employees. That kind of decision generates loyal, motivated employees, which is reflected in its operating margins.
The market is being shortsighted with this great company, looking only into the next few quarters and letting fears of slowing growth dominate the stock price. Tomorrow I'll buy shares for my "Messed-Up Expectations" portfolio, with the intention of buying more if the price drops further.
I admit it -- Expeditors is a boring company. If that's not your cup of tea, check out these four companies that could soar after the presidential election. All you need to do is click here.
At the time this article was published This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).Fool analyst Jim Mueller owns shares of Expeditors. He's an analyst for the Motley Fool Stock Advisor newsletter service. Motley Fool newsletter services have recommended buying shares of FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policy is never messed up.
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