EXPD - Expeditors International: Strong Track Record Fuels High Share Price Overvalued

2023-03-30 21:57:04 ET

Summary

• Expeditors International is a well-established logistics provider that has demonstrated a track record of impressive revenue and free cash flow growth over the years.
• EXPD is operating in a challenging global economic environment defined by rising interest rates and high inflation.
• A comparative and discounted cash flow analysis suggests that the current market price of EXPD stock may be overvalued.

Intro

Expeditors International of Washington, Inc. (EXPD) has a proven track record of strong revenue and free cash flow growth, with a focus on customer satisfaction, as a reputable logistics provider. They prioritize developing their employees, which has resulted in a unique workforce culture. Furthermore, EXPD is committed to expanding its service offerings in new markets, as the company continues to grow.

However, despite its impressive financial performance and growth potential, EXPD is currently operating in a challenging global economic environment, marked by rising interest rates and high inflation. This article's objective is to review EXPD's business model and financial performance in depth, along with its future prospects as we seek to find the company's intrinsic value.

Business Model

Expeditors International of Washington, Inc. is in the business of moving goods around the world. They offer a wide range of services that help their customers get their products from one place to another quickly and efficiently.

As a third-party logistics provider, EXPD buys space on airplanes, ships, and trucks from other companies that transport goods. They then resell that space to their own customers, who are looking for a way to move their products from one place to another. EXPD uses its expertise and technology to make sure that the goods are transported in a timely and cost-effective manner.

The company offers three primary services which include airfreight services, ocean freight services, and finally customs brokerage and other services. In addition, the company offers a variety of transportation services to its customers including warehousing and distribution, order management, transportation with specific delivery times, and much more.

EXPD ships goods from various industries, such as electronics, healthcare, and aerospace among others. To meet the specific needs of different industries, the company has specialized teams in its network that focus on providing customized solutions for each industry which has allowed EXPD to establish strong relationships with its customers which is critical for success in this industry. The company has developed a diverse customer base with no single customer making up more than 5% of its revenue.

EXPD organizes itself by the geographic regions in which it operates, and these regions are managed by district offices. EXPD has a total of 176 district offices, which are responsible for the following regions, the Americas which has 70 offices, North Asia which has 21 offices, South Asia with 16 offices, Europe with 45 offices, and finally the Middle East, Africa, and India which has 24 offices. The company has committed to open new offices in places where it makes sense to support its existing global customers and serve new local markets, as long as it sees opportunities for profitable growth.

Track Record

Over the past decade, EXPD has shown steady growth in revenue. In the most recent fiscal year, they reported $17 billion in revenue, which is a 183% increase from ten years ago. It's also impressive that they have been able to grow their revenue almost every year except for two years over that period.

EXPD has also shown significant growth in its free cash flow. In the most recent fiscal year, the company announced $2 billion in free cash flow, which is a remarkable 476% increase from a decade ago.

In addition to its impressive growth, EXPD has also shown remarkable profitability over the years. For the past decade, the company has maintained an average return on equity of 28%, with no single year below 15%.

Turning to the EXPD's balance sheet, it's evident that the company has experienced considerable expansion in its book value. Over the past ten years, the company has seen a book value growth of almost 100%. Moreover, the company has an impressive interest coverage ratio of over 79 and current ratio of 2.20, providing further confirmation to the excellent condition of its balance sheet.

Despite EXPD's impressive track record, its investors have not received outstanding returns. Over the past five years, the company's total return has kept up with that of the S&P 500, with a total return of 80% just barely outpacing the S&P 500's total return of 70%. As a result, some investors are concerned about whether EXPD stock can improve its performance.

Outlook

EXPD does business in more than 60 countries in the global logistics industry, and because it works in many different countries, the company's success is closely connected to the health of the global economy. There are many variables that can affect international trade, including the economic and political situations in the United States and other countries, the exchange rates between different currencies, and the laws and regulations around things like taxes and restrictions on trade.

When the pandemic hit, the global economy went into a recession, and trade and business activity slowed down dramatically. This caused a substantial decline in the demand for EXPD's services. However, the global economy has rebounded since then. In 2021 and 2022, the economy has improved and EXPD has seen more demand for its services again.

But there are still some risks that could affect the business in the future. The company faces new challenges like rising interest rates and higher inflation. If these challenges continue to persist, EXPD might see less demand for their services in the future, and the company may have to spend more money to keep its business running. This could hurt its revenues, operating results, and its free cash flow.

No one, not even EXPD, can predict the future and what events might happen that could affect the company. Therefore, EXPD focuses on creating a culture where it's employees and managers are well-trained and can react quickly to changes in the global economy. This helps the company adapt and do well even when things are uncertain.

EXPD's strategy for the company's growth over the long term includes focusing on the right markets and customers and aggressively promoting its services. The company is also investing in technology and taking a data driven approach to make sure it stays ahead of its competitors.

EXPD's key growth initiatives include ensuring that its strategies for air, ocean, and customs services in each district and region help the company grow at the right pace, make excellent profits, and handle the right amount of business for each service. In addition, EXPD is working on expanding its business services in and out of Europe, as management believes this region has a lot of growth potential. Finally, the company is working on growing its customs brokerage services in Asia as this is another region where management believes the company can excel.

Valuation

We will use comparative analysis and discounted cash flow ((DCF)) analysis to determine EXPD's intrinsic value. We will first perform a comparative analysis by reviewing EXPD's historical highest, lowest, and median price-to-earnings (P/E) ratios over the past five years, as well as the sector median P/E ratio . By applying these ratios to EXPD's next year's consensus EPS estimate , we will establish its fair value based on the market's past valuations.

As expected, the bull and bear case scenario both produce a large return and a substantial loss with the bear case producing a steeper decline than the bull case's upside, a 34% gain vs 53% loss. Therefore, the bear case wins the battle of the extreme scenarios.

Meanwhile, if EXPD is valued at the sector median multiple, investors would suffer a loss of only 1.33% but still a loss. The base case scenario for EXPD is based on the 5-year median P/E ratio, if this scenario does come to fruition, investors could potentially gain 7.12%. The bulls win the median case battle but overall, this comparative analysis suggests that EXPD is close to fair value.

To begin the discounted cash flow analysis, we will use the average free cash flows of EXPD from the previous five years which is $947 million. We will use a growth rate for the next ten years of just 3% per year because analysts are predicting steep declines in EXPD's revenue and earnings in the next few years. I'm using a positive growth rate of 3% rather than a negative growth rate because the starting value of $957 million represents 53% decline from last year's free cash flow.

Following the 10th year, we will assume a growth rate of 2.5% per year to find the company's terminal value. The discount rate used to discount the cash flows will be 10% which is based on the long-term return of the S&P 500 when dividends are reinvested.

Based on these inputs, the DCF analysis indicates an intrinsic value per share of $81.79. This suggests that investors could experience a potential loss of 23%. Therefore, EXPD is overvalued at its current share price based on this DCF analysis.

Takeaway

EXPD is a well-established logistics provider that has demonstrated a track record of impressive revenue and free cash flow growth over the years, with a strong focus on customer satisfaction. The company has a business model that emphasizes the importance of developing its employees, which has helped it navigate difficult times and build strong relationships with its customers. EXPD has also shown its commitment to growth by expanding its service offerings into new markets, particularly in Europe and Asia.

Despite its strong financial performance and growth prospects, EXPD is operating in a challenging global economic environment defined by rising interest rates and high inflation. The company's management has demonstrated a willingness to adapt to changes in the market, which should help EXPD navigate these risks and ensure continued success for the company.

However, a comparative and discounted cash flow analysis suggests that the current market price of EXPD may be overvalued or at least not so significantly undervalued that it screams buy for investors. Based on these results, I suggest that investors be cautious when considering an investment in EXPD, as there may be better entry points for this company in the future.

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