Expeditors International Going Down
Board: Value Hounds
I regard freight forwarders as canaries in the coalmine when it comes to making any predictions about the global economy. Freight forwarders handle the logistics of moving a customer's products around the world or locally by ship, plane and truck. They can be asset light like Expeditors International and UTi Worldwide or more heavily invested in trucks and planes as United Parcel Service is. They all depend on brisk global commerce for profitability and it should come as no surprise that freight forwarders thrive during periods of global growth and lag when the world economy loses its way during recessions.
That’s why forward guidance from freight companies deserves a heads up when they discuss expectations fro 2012.
Guidance for 2012
“As we look ahead, it is difficult to predict how the global economy and world trade will perform this year. It is likely that volumes will remain soft in the first half of the year, with the possibility of modest growth in the second half.”
“Continuing with our outlook for 2012, recent economic news about slowing in Europe and Asia is in contrast to the more optimistic tone we are seeing here in the U.S. Our expectation is for mixed economic growth around the world, with modest improvements in the U.S. Overall, we expect global economic expansion to be slightly less than the growth rate seen in 2011.”
“The Company has been very cautionary in its past two earnings releases about the fragility of the global economy and its potential impacts on future results,” said Peter J. Rose, Chairman and Chief Executive Officer.
“We've been saying for over six months now that things in the global economy just didn't seem to us to be as encouraging as a lot of the pundits were projecting. Our preliminary data seems to reveal a trend where existing customers, particularly airfreight customers, are shipping at lower volumes than we experienced during the 2011 first quarter. From our own perspective, as we proceed forward in 2012, we need to be even more aggressive in cost containment and more focused on both expanding our customer base and further extending our business reach with existing customers.”
It’s clear that Expeditors was a great deal more forthcoming and pessimistic about shipping volumes in 2012 than either UPS or UTIW. They rarely sugarcoat anything and it cost them a 7% decline the day guidance was released.
The company has never been one to hold back when it comes to communicating with investors and Wall Street. Since they do not hold conference calls, the preferred communication medium is their 8-Ks that are notable for their wit, formidable grasp of the business and high entertainment value. While these filings are a wealth of insight into the freight forwarding business, they also serve as a platform to prick jargon-laden analyst’s egos with a few well-placed barbs. No doubt these 8-Ks have become a source of guilty reading pleasure by analysts hoping to find a colleague skewered by EXPD.
A typical exchange from an 8-K:
1. Please describe any material strategic and operational mistakes the management has made in the last five years including opportunities missed?
Other than possibly answering this question, nothing really material pops to mind that we think we would have done any differently.
On the other hand, we can think of several experientially vindicating decisions we were criticized for not making (not trying to grow through acquisitions and not doing layoffs in 2008-2009 obviously chief among them) that turned out to be operationally, financially AND strategically “spot-on.” Despite having been severely chided by numerous of the pundits who promulgate the so-called “conventional wisdom of Wall Street” (which in our opinion, probably not surprisingly, is an oxymoron), we are most grateful that we didn't step into either of these and track them through the proverbial corporate living room stuck to the soles of our shoes.
Growth, Lack of, & the Recession
Expeditors is good at what they do. Freight forwarders must orchestrate the combining of pallets of product from different customers, get them on to planes, trucks and ships and separate all of it for delivery at the other end.
During the worst of the recession, the company saw negative revenue growth---something that happens infrequently. They bounced back quickly in 2010 as the global economy came back from the dead. However, as the CEO noted, the back half of 2011 was been slow and 2012 is not looking much better.
The return to higher growth in 2010 was rewarded with a near record price per share and the high PE premium they usually command.
Even as revenue dropped, the company managed to maintain margins unlike competitor UTi Worldwide. The EXPD employees are the model of an efficient workforce. Bonuses are based an operating income and that no doubt gives them incentive to make the business run at its peak. During the worst of the recession in 2009, operating margins improved. It does help they are asset-light and fixed costs are not as likely to ruin them during macroeconomic meltdowns. Their employees are their strength and Expeditors emphatically underlines it whenever they speak—or rather write. Employees come before Wall Street, analysts and even shareholders.
UTIW has operating costs that have run nearly double that of Expeditor’s, severely crimping operating margins. It’s clear who runs more efficiently. Although Expeditor’s pays employees 52% of revenue while UTI pays 31%, they leave UTIW margins in the dust.
We do spend a lot of time focusing on productivity initiatives. We've constantly surprised ourselves at where productivity gains have fallen out for us. Our focus is to make everyone in our company aware of productivity and take ownership of applying those techniques in their own areas. That requires a commitment to training, which we do…and a lot of focus on measurement and follow-up to refine the right kinds of processes while modifying or outright eliminating the wrong kinds of processes. Because of the way we compensate, our people can actually see the benefits of increased productivity in their pay monthly. This combination of factors is a powerful motivator.
Lawyers, Guns, & Money
Maybe no guns, but plenty of lawyering and fining.
The company is now in freefall from negative guidance and two legal run-ins.
The Department of Justice issued a subpoena on April 26th and is investigating possible sales to an embargoed country. If found guilty, the fines could be substantial. In March, EXPD was fined $5.5 million in a price-fixing inquiry by the European Commission. While most companies protest their innocence and always in vigorous language, I tend to believe EXPD was not culpable. They have a long track record of absolute honesty and operational competence and it seems unlikely they would stray.
From the CEO:
“Despite having been issued one of the smaller fines, it is the 'non-financial' issues more than the financial considerations that concern us most about this ruling. We have stated all along, and strongly reiterate today, that we did not enter into any agreement, in any way, that affected pricing to our customers. The evidence we presented to the EC is very clear as to this matter. It is also somewhat troubling, and a little ironic to us, that the world's largest freight forwarder [DHL, the EC's immunity applicant], who allegedly organized, orchestrated and perpetuated these so-called 'Breakfast Club' meetings in Hong Kong, has not been penalized at all for these actions. In our opinion, it's almost as if they've attempted to turn this into a competitive advantage . . . a point we raised in the oral hearing as well.”
Legal problems often have a chilling effect on stock prices and EXPD is down another 1% on the news of the DoJ subpoena.
Today, EXPD is 28% off the 52-week high and near the 52-week low of $38. The two legal actions (one resulting in a European Commission fine) and their own unvarnished downbeat view of the freight market for 2012 have combined to bring them back to multiples we don’t often see, including a PE that is now around 22, but more often hovers between 30 to 40. That makes them something of a bargain. The company rarely experiences such a confluence of bad news in such a short period of time. The legal wrangles are especially uncharacteristic for this ethical, well-run business. While there is quite likely more trouble ahead for the global economy if we are to believe guidance from UTi Worldwide, UPS and Expeditor’s, when we do get out of this, EXPD will recover and do it with their usual quiet competence.