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Expeditors Analyst Report - Gatton College of Business and

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Expeditors Analyst Report - Gatton College of Business andof,and

Expeditors Analyst Report

Authored by: Bradley Allen

December 5, 2011

    Expeditors International of Washington Inc.

    Analyst Report

The Company

    Expeditors International of Washington is a global logistics and supply chain management company. Its services include air and ocean freight consolidation and forwarding, vendor consolidation, customs brokerage, distribution, and other value-added logistics services.Expeditor’s asset-free business model and extended network give it the

    flexibility to adapt to any of its customers’ needs within the third party logistics (3PL)

    business.

    Expeditors was founded in 1981 by Peter Rose, James Wang, and Glenn Alger. It began as a single office in Seattle, WA as a one-stop shop for transportation and customs brokerage, which was a combination new to the industry. It has since grown to 251 offices worldwide, covering six continents. It had a single acquisition in 1985 of Pac Bridge, a major non-vessel ocean common carrier (NVOCC) company. Expeditors is a Fortune 500 company and its stock is traded on the Nasdaqwith the ticker EXPD. The stock is currently priced (11/30/11) at $41.02 per share.

The Business

    Expeditors is a company that provides a wide array of logistics and supply chain management services. These services can be categorized into two broad segments: transportation and customs brokerage (plus other services).

    Transportation: This segment covers the freight forwarding aspect of the business. Expeditors partners with key air, ocean and ground carriers to provide customizable and integrated global transportation solutions. Airfreight accounts for roughly 38% of net revenue, and ocean freight accounts for roughly 23% of net revenue.

Customs brokerage and other services: This segment includes supply chain solutions,

    customs and compliance, distribution, warehousing, and risk management. Expeditors specializes in offering flexible logistic solutions and providing innovative approaches to global customs programs. It also offers expertise on distribution center management, customized insurance, and supply chain security. Customs brokerage and other services accounts for roughly 39% of net revenue.

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Competitors

    The 3PL industry is highly competitive, and the competition will only increase as globalization and the international shipping market continue to grow. Expeditors’ top

    publicly traded competitors in the United States include UTi Worldwide, Inc. (an asset-light 3PL company) and C.H. Robinson Worldwide, Inc. (a non-asset 3PL company). Expeditors also competes to a certain extent with the integrated shipping titans United Parcel Service, Inc. (UPS) and FedEx Corporation.

    Competitors are constantly putting downward pressure on prices within this industry, and the 3PL business could be at risk of commoditization. Expeditors, however, avoids becoming commodity-like through the achievement of superior economic performance, a continual effort to provide unique offerings to customers and to build relationships, and by attracting and retaining the most valuable talent. The company has proven its value as a leading 3PL company by maintaining high net operating margins.Over the past five years, Expeditors has had an average net operating margin close to 30%, which is roughly double that of both UTi Worldwide and C.H. Robinson.

Economic Moat

    There are three things that differentiate Expeditors from its competitors and contribute to its wide economic moat: its non-asset business model,its large network, and its superior profitability.

    The non-asset business model refers to the fact that Expeditors does not own its own ships or planes; instead it purchases cargo space on air and sea carriers and fills it with clients’ cargo. This strategy is an advantage over asset-heavy competitors because asset-heavy 3PL companies tend to focus more on filling their capacity than fulfilling their customers’ needs. With no assets, Expeditors is able to remain flexible and to offer customizable services to its customers. Therefore, it is more customer-oriented.

    Having a large network is an important aspect of the 3PL industry, and Expeditors has been able to build and maintain excellent relationships with buyers, suppliers, and governments through organic growth, a record of reliable delivery, and superior processes.

    The main indicator of a strong company in this industry is profitability, and Expeditors has been able to maintain excellent profit and operating margins because of its strong management and close ties to Asia. Expeditors has a particularly strong foothold in the Asia-North America channel, which is highly profitable. Expeditors’ profit and operating

    margins are 6.25% and 9.82%, respectively, which areconsiderably higher than its two main U.S. competitors.

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Management

    Peter Rose is the Chairman and CEO of Expeditors, and he was elected to this position in 1991. He was one of the founders of the company in 1981 where he started as the Vice President. The average tenure of the executives at Expeditors is roughly 21 years, so there is an abundance of experience at the top of the company. Under Rose’s leadership,

    Expeditors has maintained focus on the long-term success of the company and has experienced consistent growth.

    Management at Expeditors goes to extensive lengths to ensure transparent financial information. Rose himself publishes written responses to investor questions on a fairly regular basis, which shows his dedication to the company’s investors. Management also

    shows great loyalty to its employees. Unlike its competitors, Expeditors did not layoff workers during the recession in 2008 to cut costs, and in his 2010 Letter to the Shareholders, Rose said, “We have always said that our primary job is to take care of our people, their primary job is to take care of our customers, and that should take care of Wall Street.” The value placed on employees allows Expeditors to maintain its strong network as well as its unified and unique corporate culture.

Financials& Profitability

    Expeditors is a non-asset company that has grown organically, thus, it has a large amount of cash and zero debt. This situation allows Expeditors to cut costs if necessary and to distribute excess cash to investors in the form of a dividend. The table below shows a brief summary of Expeditors’ key financial statistics.

    Market cap: 9.02 B

    Total cash: 1.26 B

    Total debt: 0

    Profit margin: 6.25%

    Operating margin: 9.82%

    Forward P/E: 20.35

    EPS: 1.81

    PEG Ratio: 1.53

    Short ratio: 2.2

    ROIC: 49.70%

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    The profitability of Expeditors is the best among public U.S. freight forwarders, and its high ROIC suggests that it is efficiently using its capital. The high P/E ratio is common in the logistics industry as Expeditors’ main competitors have an average forward P/E ratio

    around 19. Also, the low short ratio indicates a bullish signal for the company.

Morningstar Perspectives

Bulls Say:

     Expeditors' revenue growth is predominantly organic, and has been clipping along at a steady pace. During the five years preceding the 2009 freight recession, Expeditors compounded growth at a double-digit pace, and the firm recovered gross revenue by

    46% in 2010.

     Expeditors' profitability is best in class among public U.S. freight forwarders--double

    that of close competitor UTi Worldwide.

     Expeditors' non-asset-based model generated an average 27% return on invested

    capital during the past five years.

     International third-party logistics service and freight forwarding is a strong and growing industry.

     Client concentration is low: No single customer accounts for greater than 5% of revenue.

Bears Say:

     Slowdown in global exchange diminishes the pool of available business for Expeditors, but the firm demonstrated the flexibility of its model when in 2009 a 27% lower gross revenue shock pushed operating margins (as a percentage of net revenue) only down to 27.8% from 29.5% in 2008.

     The firm holds cash reserves well above levels needed to conduct business. Interest income reflects a return on cash and short-term investments well below the firm's

    return on capital invested.

     The firm is subject to a variety of risks because of its reliance on international operations, including political and currency risk.

     In its attractive and growing market, Expeditors competes with freight forwarders like DHL and Kuehne + Nagel, as well as against integrated shipping titans UPS and

    FedEx.

Valuation

    I used conservative estimates in my valuation model to determine the fair-value price of a share of Expeditor’s stock. I used a beta of 1.02 because the 3PL industry is cyclical. I also used a slightly lower P/E ratio of 18. The table below depicts fair-value estimates from Bloomberg, Yahoo Finance, Morningstar, and me along with each respective margin of safety compared to the stock price of $41.02 (the price on the day I presented). 3/28/14 Expeditors 5

     Source: Fair-value Margin of safety: estimate:

    Bloomberg $53.50 30.42%

     Yahoo! $52.67 28.40%

    Morningstar $61.00 48.71%

     Bradley Allen $49.95 21.77%

    All of the estimates in the table provide an adequate margin of safety of at least 20%.

Recommendation

    I recommend selling 260 shares of FCN and 152 shares of CNX in order to purchase 379 shares of EXPD. This order will make Expeditors roughly 5% of the TVA portfolio. Expeditors is a strong buy due to its wide economic moat, healthy financials, and strong management. It is also currently undervalued by nearly 22% according to my fair-value estimation.

Sources

Bloomberg

Expeditors 10-K

Expeditors 10-Q

Expeditors.com

Morningstar

Value Line

Yahoo! Finance

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Update as of 5-1-2012

    By Michael Boone

    EXPD continues to be a leader in the third party logistics (3PL) and supply chain market. The company’s asset-light business model as well as its vast international network contributes to the wide economic moat of the company. EXPD is well managed and Peter Rose, the current CEO, is well respected in and outside the company.

     st, 2012 EXPD was trading at $40.62. On May 1

    Morningstar has a fair value estimate of $61, I valued EXPD at $59, and Yahoo Finance has a one-year target estimate of $49. With these current valuations the margins of safety are well above our target of 20 percent.

    I recommend to hold onto EXPD but to monitor the company closely. I believe the company still has a strong position in the 3PL market and has lots of international exposure. This exposure will lead to increased revenues in the long run as the global economy beings to return to pre-recession levels. However, the global economy may take some time to turn around and we should monitor the company until then. 3/28/14 Expeditors 7

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