Expeditors: A Look at Logistics

07/10/2015 8:00 am EST


Stephen Leeb

Founder and Research Chairman, Leeb Group

Our latest new portfolio recommendation serves companies all over the world by helping them ship their products in the most efficient, cost-effective ways, explains Stephen Leeb, editor of The Complete Investor.

This is a daunting challenge that individual companies would be hard-pressed to handle on their own. The company is logistics expert Expeditors International of Washington (EXPD).

In its air and ocean freight services segments, Expeditors International works to minimize freight charges for its clients, for example, by consolidating shipments.

It also performs such services as packing up shipments and obtaining insurance, and making sure shipments comply with the laws of the destination country, something that requires extensive and specialized knowledge.

A big plus for Expeditors is that its growth has been largely organic rather than through acquisitions.

This means it is almost always working with technologies with which it has long familiarity, giving it an edge over competitors whose reliance on acquisitions has meant contending with a sprawling array of systems.

Its strategy of relying on internal growth is validated by operating margins roughly 50% higher than those of the leading competitor.

The company’s most profitable division is custom brokerage, whose job is to assist importers in clearing shipments into the US.

This, too, is no easy task, especially in a world of heightened vigilance for contraband goods.

Comprehensive knowledge of Homeland Security requirements is just one part of the job. Documentation, along with determining duties and taxes, which can be revised at any time, also is part of the mix.

Adding to the complexity of the job is that Expeditors International operates on six continents and in most of the world’s major cities, meaning it’s dealing with the intersection of the laws of a host of countries.

As technological options keep expanding, the edge Expeditors has over its competitors should continue to widen and we expect the company to remain not just the most profitable player in this critical industry, but the fastest growing.

Expeditors generates a free cash flow yield of approximately 5%, most of it returned to shareholders through share repurchases and rising dividends.

And while by some measures the stock might seem expensive, the debt-free balance sheet and the company’s competitive advantages make the relatively high valuation easier to swallow.

Consensus long-term growth estimates could prove conservative and we wouldn’t be surprised to see growth of 15% over the next five years. We expect the stock will easily outperform the market in coming years.

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