|Shares Out. (in M):||186||P/E||21||0|
|Market Cap (in $M):||8,264||P/FCF||20.5||0|
|Net Debt (in $M):||-975||EBIT||652||0|
|Borrow Cost:||Available 0-15% cost|
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Expeditors International of Washington, Inc. (“Expeditors” or “the Company”) appears to be an attractive near-term short opportunity. During 2015 the Company earnings benefitted from two main things: (i) customers converting a portion of their ocean freight shipments to airfreight due to port disruptions on the U.S. West Coast and (ii) an expansion in airfreight yields driven by opportunities the Company came across to obtain lower spot market airfreight prices without having to decrease the relative pricing sold to customers. Despite the fact that these effects are non-recurring and caused the Company to “over earn” in 2015, consensus projections for 2016 appear to be based on continuing growth off the inflated 2015 base.
Accordingly, the near-term short opportunity is the following: after the Company reports 4Q15 numbers on 2/23/16, sell-side analysts will likely take the opportunity to reset their expectations for 2016 which appear stale and really haven’t moved since August 2015. Currently, the consensus EPS estimate for 2016 is $2.49. For reasons detailed below, I believe expectations could be reset to $2.12. Even if the stock holds its current 18x PE multiple, on an EPS expectations of $2.12 this equates to a <$38 stock price, or >15% downside from current levels. While I’m not betting on a reduction in the PE multiple, any compression would provide additional downside.
Please note that Expeditors was written up on VIC on May 25, 2015 by SpocksBrainX and on August 15, 2013 by leob710. These write-ups provide additional detail and color and should be referred to for further reference. Of note, I agree with both authors that this is a high quality business and am only recommending shorting Expeditors for a near-term trade.
Expeditors’ primary services include air and ocean freight transportation and customs brokerage. As described in Expeditors’ SEC filings, the Company generates the major portion of its air and ocean freight revenues by purchasing transportation services on a wholesale basis from direct (asset-based) carriers and reselling those services to its customers on a retail basis. The difference between the rate billed to customers (the sell rate) and the rate paid to the carrier (the buy rate) is termed “net revenue” or “yield”. By consolidating shipments from multiple customers and concentrating its buying power, the Company is able to negotiate favorable buy rates from the direct carriers, while at the same time offering lower sell rates than customers would otherwise be able to negotiate themselves.
Shown in the table below is Expeditors’ historical, quarterly financial performance as well as my projections for 4Q15 through 4Q16. All of the information presented can be found in the Company’s quarterly earnings releases.
|Q1 2014||Q2 2014||Q3 2014||Q4 2014||Q1 2015||Q2 2015||Q3 2015||Q4 2015||Q1 2016||Q2 2016||Q3 2016||Q4 2016|
|Airfreight Kilos (y-o-y % change):|
|Ocean Freight FEU (y-o-y % change):|
|Implied Pricing (y-o-y % change)|
|Ocean Freight and Ocean Services||(6.7%)||(3.0%)||3.3%||5.7%||8.6%||2.5%||(6.7%)||(2.0%)||(2.0%)||(2.0%)||(2.0%)||(2.0%)|
|Ocean Freight and Ocean Services||469.2||536.4||600.5||568.2||565.7||576.8||560.0||556.9||548.7||599.8||582.4||579.2|
|Customs Brokerage and Other Services||375.3||395.4||418.2||420.6||404.4||421.0||431.7||429.0||412.5||429.4||440.4||437.6|
|Total Revenue Growth, %|
|Ocean Freight and Ocean Services||5.3%||9.0%||14.3%||14.7%||20.6%||7.5%||(6.7%)||(2.0%)||(3.0%)||4.0%||4.0%||4.0%|
|Customs Brokerage and Other Services||8.0%||7.4%||8.7%||8.4%||7.7%||6.5%||3.2%||2.0%||2.0%||2.0%||2.0%||2.0%|
|Ocean Freight and Ocean Services||367.4||423.7||475.5||446.2||445.5||433.4||416.1||414.9||411.6||461.9||448.4||446.0|
|Customs Brokerage and Other Services||176.8||187.5||199.4||203.0||189.6||199.1||201.1||199.9||192.2||200.1||205.2||203.9|
|Ocean Freight and Ocean Services||101.8||112.7||125.0||122.0||120.3||143.4||143.9||142.0||137.2||138.0||133.9||133.2|
|Customs Brokerage and Other Services||198.5||207.9||218.8||217.6||214.8||221.9||230.6||229.1||220.2||229.3||235.2||233.7|
|Net Revenue Margin, %|
|Ocean Freight and Ocean Services||21.7%||21.0%||20.8%||21.5%||21.3%||24.9%||25.7%||25.5%||25.0%||23.0%||23.0%||23.0%|
|Customs Brokerage and Other Services||52.9%||52.6%||52.3%||51.7%||53.1%||52.7%||53.4%||53.4%||53.4%||53.4%||53.4%||53.4%|
· Volume – Note that Airfreight volume growth has been decelerating on a year-over-year comparable basis from 13% in 1Q15, to 9% in 2Q15 to 3% in 3Q15. The non-recurring volume increase the Company experienced from the West Coast port strike is causing comps for 4Q15, 1Q16 and 2Q16 to be very difficult, something management acknowledges in their 2Q15 earnings release when they state, “We are, however, fully aware of the stiff comparable that exists in the second half of 2015.” Ocean freight volumes are also decelerating due to difficult comps. To take into account these difficult comps, I am using the volume projections presented above.
· Price – While the Company doesn’t present specific pricing information, it can be “backed out” using the volume and revenue figures provided. Note that pricing for Airfreight Services has been declining for the past seven quarters and pricing for Ocean Freight is now also starting to decline. Management commented in their most recent 10-Q that the reducing in pricing was due to “lower average sell rates in response to competitive market conditions”. I am projecting further declines in pricing, roughly in-line with these trends.
· Revenues – Based on the volume and price projections presented, Expeditors’ revenue growth in 2016 should only be ~1%, far less than the 4% projection of consensus estimates
Net Revenues and Net Revenue Margins:
· Note that in 2Q15 and 3Q15, the Company’s Net Revenue Margins for Airfreight Services reached 26.9% and 29.6%, respectively. This is well above the 24.7% average Net Revenue Margin the Company generated in Airfreight Services over the prior 9 quarters from 1Q13 through 1Q15. As presented in an 8-K filed on 08/21/15 and in response to a question about the sustainability of these margins, management essentially admitted that they were non sustainable. Management commented, “Airfreight yields over the last quarter were largely driven by opportunities to obtain spot market pricing without having to decrease pricing sold to customers at the same pace. Historically, our purchase and sell prices tend to track each other over time and we expect customers and carriers to adjust to current market conditions.” Net Revenue Margins for Ocean Freight also expanded 24.9% and 25.7% in 2Q15 and 3Q15, respectively, well above the 21.7% average Net Revenue Margin the Company generated in Ocean Freight over the prior 9 quarters from 1Q13 through 1Q15. I am projecting that these margins decrease back down to levels more in-line with historical averages.
Annual Financial Projections
Based on the above, as well as projecting the Company repurchases $500mm worth of stock at the current price of $45/share, my estimates for the Company for 2016 are presented in the table below. Based on these projections, Expeditors 2016 EPS would be closer to $2.12, well below the consensus estimate of $2.49.
|Cash Gross Profit||1,882.9||1,981.4||2,244.4||2,180.7|
|Salaries & Related Costs||1,032.6||1,065.3||1,176.6||1,233.9|
|% of Revenue||17.0%||16.2%||17.4%||18.0%|
|Rent and Occupancy Costs||98.4||102.8||104.1||109.7|
|% of Revenue||1.6%||1.6%||1.5%||1.6%|
|Selling and Promotion||33.2||38.1||40.6||41.1|
|% of Revenue||0.5%||0.6%||0.6%||0.6%|
|Other Operating Expense||118.4||131.2||142.7||144.0|
|% of Revenue||1.9%||2.0%||2.1%||2.1%|
|Total Operating Expenses||1,282.7||1,337.5||1,464.0||1,528.7|
|Total Depreciation and Amortization||48.1||49.3||45.9||46.0|
|Net Income||$ 350.0||$ 379.5||$ 464.3||$ 380.9|
|Net Income to Common||$ 348.5||$ 376.9||$ 462.2||$ 378.9|
|FD Shares Outstanding||206.9||196.8||190.1||179.1|
|FD EPS||$ 1.68||$ 1.92||$ 2.43||$ 2.12|
4Q15 earnings reported on 02/23/16 and subsequent recast of sell-side estimates for 2016.
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