Can Expeditors International Expedite My Early Retirement? (EXPD)

[Update 04/08/2015: The SeekingAlpha editon has been published!]

Quick Background:

Expeditors International of Washington, Inc (EXPD) was founded in 1979 in Seattle, Washington, USA. From a single office focusing solely on ocean forwarding, EXPD has grown to employ over 13,000 people in 250 locations on six continents. The company’s services include: “the consolidation and forwarding of air or ocean freight, customs brokerage, vendor consolidation, cargo insurance, time-definite transportation, order management, warehousing, distribution and customized logistics solutions”. Importantly, EXPD is a non-asset based third-party logistics (3PL) provider, which means that it does not own any transportation equipment of its own. Rather, it relies on relationships with asset-based carriers to move goods. Since 3PLs don’t need to worry about costs of fleet maintenance and other capital expenditures, they can pass the resultant cost savings on to their customers. In the logistics space, the company competes with the likes of FedEx (FDX), UPS (UPS), and C.H. Robinson Wordlwide (CHRW).

For more basic information, check out the company’s website, the 2013 annual report, and the 2014 10-K.

An investment of $10,000 in December 2000 would be worth $37,930.51 today, all dividends reinvested. This yields an annual rate of return of 9.8%, which more than doubles the S&P 500’s AROR of 4.3% during this time frame.

Sparknotes Analysis:

Let’s run our screening criteria on EXPD to see where it stands as a dividend investment:

• Pays a dividend: Yes
• Has 5+ years of dividend increases: Yes (20 years)
• Has not frozen dividend for over 8 quarters: Yes
• Has a Chowder number of 12 or more: Yes (12.3)
• Has am EPS payout ratio of less than 70%: Yes (33.33%)
• Pays a dividend monthly or quarterly: No (Semi-annually; June, December)

• Has an S&P Quality Ranking of ‘A-‘ or better: Yes (A)
• Has generally increasing earnings over the past 10+ years: Yes
• Is fairly valued/undervalued according to the Normal P/E ratio (blue line): Yes
• Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): No

Other Ratings:

• S&P Capital IQ: 3-star hold
  • Scale is 1-5, 1 being ‘strong sell’, 5 being ‘strong buy’
• Thompson Reuters StockReport: 6 (optimized score of 4)
  • Scale is 1-10, 10 being best, 1 being worst
  • Optimized scores weight insider trading and price momentum heavier than other criteria
• Value Line: 2 for safety; 4 for timeliness
  • Scale is 1-5, 1 being best, 5 being worst
• Morningstar:
  • Moat: Wide
  • Stewardship: Exemplary

Financial Overview:

EXPD has a mediocre dividend yield of 1.37%. The company pays out $0.32 semi-annually, $0.64 annually. However, this dividend is extremely safe. The company pays out only 1/3 of earnings to dividends, indicating that dividend increases can occur for many years, solely by expanding the payout ratio. The company has no debt at all, which means no interest payments to make. The company reported 2014 operating cash flow of $395 million, and had $967 million in cash and cash equivalents on the balance sheet. Given that there are 196,768,067 diluted shares outstanding and $0.64 per share in dividends paid out annually, we see that dividends cost $125.9 million annually. This clearly shows cost of dividend payments is well-covered by both generated cash flow and liquid cash in the bank.

A side note: the company experiences quarterly differences in cash flow. As explained in the 10-K:

“The Company’s business is subject to seasonal fluctuations. Cash flow fluctuates as a result of this seasonality. Historically, the first quarter shows an excess of customer collections over customer billings. This results in positive cash flow. The increased activity associated with peak season (typically commencing late second or early third quarter and continuing well into the fourth quarter) causes an excess of customer billings over customer collections. This cyclical growth in customer receivables consumes available cash.”

As mentioned above, the company still has enough cash to cover this deficit later in the year. Although I am not normally a fan of semi-annual dividends, they may help the company conserve cash during the later quarters, thereby bolstering the company’s balance sheet.

Dividend growth has been declining in the past few years. The 10-year dividend growth rate was a stellar 19.3%. The five-year DGR slowed a bit to a still-respectable 11.0%. The three-year DGR of 8.6% and one-year DGR of 6.7% indicate a serious slowdown. As you can see by the FAST Graphs chart, earnings haven’t been slowing down. I feel the company perhaps wants to conserve cash for expansion. The company is starting to become saturated with offices in major destinations. Growth will be harder and more expensive to come by, since the company has to expand in secondary, less-profitable markets. It then makes sense to conserve cash for this. Also, the company is also a net purchaser of shares, going from 212.89 million in 2010 to 191.75 million currently. This could also explain the lower dividend increases, as the share count drastically decreased starting in mid-2012. Perhaps management is starting to prefer share buybacks over cash dividends. Although I do like being rewarded either way, I do have a bias for cash dividends, so I view this neutrally. The company has had two 2:1 stock splits recently, in 2000 and 2005.

EXPD’s current P/E ratio of 24.3 is a bit high. However, the one year forward P/E of 19.3 is better. I view this compression as positive, as it hints at rising earnings next year. EXPD’s gross margin is only half of its peer group’s, 30.18% vs 60.98%. However, EXPD’s operating and net profit margins are much better, at 9.06% vs 7.34% and 5.78% vs 4.58% respectively.

If we project the past compounded annual growth rate into the future, we can estimate the returns of a purchase of EXPD made today. Using FAST Graphs, we can see that EXPD is expected to grow earnings 17.3% by 2020. If we assume the company reverts to its historically earnings-appropriate P/E ratio of 17.3, we can see an annualized rate of return of 12.88% by 2020. FDX’s AROR for the same time frame is 0.38%, UPS’s is 8.12%, and CHRW’s is 12.32%.  This makes sense, as EXPD is a mid-cap company, smaller than each of its competitors. Ergo, it is easier for the company to grow significantly, and therefore drive outsized returns in relation to the peer group.

Risk Factors:

• Leadership transitions: On April 1st, 2015, the company’s President and Chief Operating Officer, R. Jordan Gates, announced his intention to retire later this year. This follows the announcement of the upcoming retirement of James Wang, a co-founder of EXPD and president of the Asia/Pacific branch, due to occur in June 2015. To top it all off, the former CEO, Peter Rose, left the company in March 2014. Although the new CEO, Jeffery Musser, appears to be a suitable fit for the role, the departure and replacement of so many key executives is a bit concerning. Most of the retiring executives have been with the firm for decades. Wang and Rose worked for EXPD since 1981. Gates was hired in 1991, and oversaw the expansion of EXPD into Europe. While it’s good to see that these people are leaving EXPD on good terms, it’s also a bit disconcerting to see them leave all at once. While the company seems to have a strong culture and a promote-from-within philosophy, any new leadership needs to be watched closely.
• Industry-specific risks: EXPD operates in a very intensely competitive industry, with all the risks involved therein. Pricing wars have been known to occur, though EXPD has enough of an economic moat to bear the brunt of it. As an international corporation, EXPD also has to submit to many different and potentially-conflicting laws, such as those regarding bribery. Finally, the company has to operate in countries that may or may not be hostile to the US, which could lead to risks to the company’s people and profits, especially if anti-American sentiment manifests openly via riots or wars.

Final Conclusion:

Strictly speaking, the company does not meet my criteria for purchase at this time. However, I do like the company. I feel the dividend is extremely safe, and I actually view the semi-annual dividend as a positive. The lack of debt is also very attractive. However, I view the slowing dividend growth rate neutrally. I see that the company still wants to reward shareholders, but I do prefer that extra bit of cash in my pocket. I like the moat and leadership, but view the recent retiring of multiple executives a bit cautiously. Thinking about it, I may actually waive the semi-annual criterion for EXPD, as I feel it happens for a good reason. All in all, while maybe not the best immediate purchase, I think EXPD is a good stock to buy on dips, and will add it to my watchlist for further monitoring.

What do you think? Does EXPD make the cut for your portfolio? Also, how can I improve future analyses?

Disclosure: None

All data is accurate as of market close, 04/08/2015. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Company logo image source is available here. Data source is FAST Graphs, David Fish’s US Dividend Champions List, or company materials, unless otherwise indicated.

Tags: dividend-stock-analysis, EXPD, Expeditors International, Expeditors International of Washington Inc