On Jun 24, 2014, we updated our research report on leading third party logistics provider Expeditors International of Washington Inc. (EXPD). We remain encouraged by the company’s non-asset based model and diversified freight forwarding solutions, while growth in the customs brokerage business continue to boost its margins. However, we remain cautious about the near-term softness in ocean freight demand. Expeditors currently carries a Zacks Rank #3 (Hold).
Over the long term, we expect Expeditors to outperform its peers based on its strategic initiatives, superior business and growing supply chains. Volume improvement rather than price serves as the primary growth driver for the company.
Expeditors airfreight volume is reflecting an improving trend and can grow further, if the Trans-Pacific trade lane between the U.S. and China and the general global economic scenario recovers. Further, the company is also seeking expansion in the high-margin customs-brokerage business that depends upon growing global trade and increased import and export activity around the globe.
The company is undertaking strong cost-control measures which are likely to remain accretive to margins. Additionally, Expeditors’ strong cash balance will not only drive its investment plans but also provide higher returns to its shareholders in the form of dividend payments or share repurchases. In May 2014, the company again hiked its dividend by 6.67% to $0.62.
Expeditor derives a significant part of its revenue from customers in industries with shipping patterns tied closely to consumer demand and production schedules. Weak consumer and business demand and delay in manufacturing might hurt the company’s revenues. Lowering of 2014 U.S. GDP growth rate by FOMC (Federal Open Market Committee) also remains a concern for Expeditors.
An overcapacity situation as compared to demand within the industry indicates a seasonal slowdown, thus pressurizing the carrier’s rate. We believe that given increased pricing discipline among ocean shippers and overcapacity situation within the sector, ocean freight yields (revenue per unit) will likely remain volatile throughout 2014. Furthermore, international air and ocean freight forwarding and customs brokerage are intensely competitive and are expected to remain so in the foreseeable future.
Better-ranked stocks that warrant a look in this sector include Trinity Industries Inc. (TRN), CSX Corp. (CSX) and Canadian Pacific Railway Limited (CP). TRN sports a Zacks Rank #1 (Strong Buy), while CSX and CP carry a Zacks Rank #2 (Buy).