EXPD - Expeditors International of Washington: I Anticipate Weakness In The Near-Future

2023-09-28 12:21:59 ET

Summary

• Expeditors International of Washington, Inc. is a global logistics company that acts as a third-party logistics provider, working with carriers to transport goods for clients.
• The freight forwarding industry is facing challenges such as overstocked inventory, a shift from goods to services, high inflation, increased freight capacity, and competition from freight tech disruptors.
• EXPD's financial performance in the second quarter of 2022 raised concerns, with a significant drop in earnings and revenues. The company is expected to face headwinds and a decline in revenue in the upcoming quarters.

Summary/Business

Expeditors International of Washington, Inc. (EXPD) is a global logistics company that provides a wide range of services to help businesses move their goods around the world. They act as a third-party logistics provider [3PL], which means that they work with other companies, such as airlines, ocean shipping lines, and trucking lines, to transport goods on behalf of their clients. Expeditors do not own any aircraft or ships but instead negotiate bulk rates with carriers and then pass those savings on to their clients.

In the past, EXPD saw impressive growth in revenue, primarily due to a surge in shipping linked to the impacts of COVID-19 in 2021–2022. However, discounting these unusual years, the true CAGR was a more moderate 6%. In the most recent second quarter, EXPD encountered significant financial challenges as the surge in shipping related to COVID-19 dwindled. Looking ahead, considering the influence of inflation and the shift from goods to services with economies reopening, EXPD's revenue is anticipated to decline further. Heightened inflation has dampened consumer demand for goods and led to excess inventory, reducing the necessity for freight services and impacting EXPD's revenue. Additionally, an oversupply of freight capacity has pushed down freight prices, compounding the impact on revenue. Considering these factors and the emergence of freight tech disruptors, I suggest a sell rating for EXPD due to the associated risks and uncertainties regarding its growth prospects.

Financials / Valuation

Over the last 5 years, EXPD has shown an impressive 116% CAGR in revenue. However, this figure was notably skewed due to the shipping boom of 2021–2022, attributed to the effects of COVID-19. If I exclude these exceptional years and focus on the revenue before the pandemic, the actual CAGR stands at a more modest 6%. In its most recent second quarter, EXPD's financial performance raised concerns. The diluted net earnings attributed to shareholders per share plummeted by 43% to $1.30. Net Earnings Attributable to Shareholders also saw a significant drop of 48% to $197 million. Operating income followed this trend, decreasing by 51% to $248 million, and revenues also decreased by 51% to $2.2 billion. Notably, airfreight tonnage volume dropped by 15% and ocean container volume decreased by 13%.

These results suggest that the company is grappling with significant challenges, primarily stemming from falling rates and demand exacerbated by an oversupply. This is markedly different from the scenarios EXPD encountered in the pandemic's initial phases. The management anticipates these hurdles to continue into the forthcoming quarters, seeing no immediate improvements for FY23. To mitigate this, management plans to introduce cost-control strategies.

Looking forward, we will continue to thoughtfully manage down our headcount and exert other efforts to align our costs with these lower levels of demand. In many ways, current conditions are very much the reverse of what we experienced in the early days of the pandemic, as the current marketplace shifts to a lower gear on increased capacity and falling rates and demand. We do not see those conditions changing meaningfully before the end of the current year. Shippers are cautious, the economy remains uncertain, and carrier capacity does not adequately reflect the current levels of marketplace demand. Source: EXPD 2Q23 Results .

Based on my view on the business, I anticipate a 44% decline in EXPD's revenue for FY23, followed by stagnant revenue for FY24, aligning with the general market consensus. This projection is influenced by the disappointing financial results of the second quarter, indicating a subsiding of the shipping boom driven by COVID-19 during 2021 to 2022, a trend expected to continue diminishing until the end of 2023.

The current high levels of inflation have significantly impacted consumer demand for goods, prompting a reduction in consumer spending. Concurrently, the excess inventory situation has notably diminished the need for freight services as companies struggle to manage their inventory in the face of escalating inflation. This overstocking issue is further intensified by the gradual shift from goods to services observed as borders reopen and the economy readjusts. Additionally, an oversupply of freight capacity has driven down freight prices, negatively impacting EXPD's revenue.

As of now, EXPD's forward EV/EBITDA stands at 14.44x, surpassing its peers like XPO (XPO) and C.H. Robinson Worldwide (CHRW), which are trading at a median EV/EBITDA of 11.72x. This higher multiple can be attributed to EXPD's higher margins in comparison to its peers. EXPD boasts a gross margin of 26.33%, higher than the peer median of 21.49%. Moreover, EXPD generates a higher LTM revenue of 12.64 billion, twice the size of the peer median of 6.95 billion.

Using EXPD’s present forward EV/EBITDA, my target price for EXPD's is $82.60. If EXPD's performance in the upcoming quarters falls below expectations, its share price will face additional downward pressure as its valuation contracts. Therefore, given the associated risks and uncertainties regarding its growth outlook, I recommend a sell rating for EXPD.

Comments

The period spanning the year 2020 to 2022 saw an exceptional surge in demand for goods , clashing with limited capacity. This clash drove up spot rates significantly across transportation modes, particularly ocean and airfreight, benefiting global forwarders. This surge in demand, however, led to congestion and subsequent delays in shipments. Retailers responded by excessively ordering , hoping to secure inventory at any cost to meet the heightened consumer demand. Nevertheless, the emergence of inflation, geopolitical pressures, and the lifting of COVID restrictions resulted in a sudden decline in demand. This left retailers with excessive and often wrong types of inventories, prompting a shift from restocking to destocking as companies tried to manage the surplus. This transition, coupled with a move from goods to services as COVID lockdowns eased and the economy reopened, marked the end of the flourishing period for freight forwarding. The ongoing and substantial inflation further exacerbated the situation, suppressing consumer spending and subsequently reducing demands for freight forwarding services.

The demand for freight forwarding as well as the price of ocean and air freight have a significant impact on EXPD's earnings. Referring to the Baltic Exchange Dry Index , it has seen a significant decrease, dropping to 1593 from its peak of approximately 5540 in 2021, marking a substantial decline of about 71%. Since the beginning of 2023, the index has been maintaining a relatively stable trend. As freight capacity continues to increase, it will drive down freight costs, subsequently affecting EXPD's revenue. This effect is compounded by both the declining prices and the reduced demand for forward freighting, creating a challenging situation for EXPD's revenue. The combination of expanding freight capacity due to diminishing demand for freight forwarding, mainly caused by overstocked inventory, is anticipated to heavily impact freight costs.

Freight tech disruptors have ventured into the forwarding industry. Their primary focus is on leveraging technology to operate inclusive platforms that facilitate connections among carriers, freight forwarders, and importers and exporters. This approach aims to enhance the overall international shipping experience. Recent research by NVOCC ECU Worldwide, involving 963 forwarders, suggests a growing segment of the market is inclined to use digital channels for making ocean bookings. The survey emphasized that nearly half of the bookings were completed through email, while only 35% were finalized using apps and portals. However, it's projected that this latter number will double by the end of the year. The increasing presence of freight technology disruptors raises concerns about heightened competition, especially during a period of economic fragility.

Risk & conclusion

In the aftermath of the COVID-19 pandemic, many economies have pivoted from goods to services, causing a decline in freight service demand, which is challenging for companies like EXPD. However, should this trend reverse, with a renewed focus on goods, it will drive EXPD’s revenue upwards. Tools such as the ISM Non-Manufacturing Index will be instrumental in tracking shifts between consumer preferences for goods versus services.

Additionally, rising inflation has led to decreased consumer spending, resulting in a surplus of unsold products and subsequently, a reduced need for freight services. A positive turnaround in inflation could invigorate consumer spending, driving up the sales of the accumulated stock and increasing demands for freight services, which will drive EXPD’s revenue upward. Observing the FED's interest rate decisions and tracking the CPI will offer valuable insights into inflationary trends.

Currently, the freight service market faces challenges due to oversupply, leading to suppressed prices. However, a resurgence in freight demand or a decrease in freight capacity could elevate freight prices, directly benefiting EXPD's revenue. The Baltic Exchange Dry Index serves as a useful indicator to monitor these industry dynamics.

To summarize, EXPD's significant historical revenue growth can be largely attributed to the surge in shipping driven by the impacts of COVID-19 in 2021–2022. However, when excluding these extraordinary years, the actual annual growth rate was a more moderate 6%. In the most recent second quarter, EXPD encountered considerable financial challenges as the surge in shipping linked to COVID-19 started to diminish. Looking ahead, considering the impact of inflation and the shift from goods to services as economies reopen, EXPD is expected to see a further decline in revenue. Increased inflation has reduced consumer demand for goods, resulting in excess inventory and a decreased need for freight services, thereby impacting EXPD's revenue. Furthermore, an oversupply of freight capacity has led to a decline in freight prices, further exacerbating the impact on revenue. Taking into account these factors and the emergence of disruptive freight tech companies, a recommendation of a sell rating for EXPD is prudent due to the associated risks and uncertainties regarding its growth prospects.

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