Following the strong second quarter results, we are upgrading our recommendation to Outperform from Neutral on Expeditors International of Washington Inc. (EXPD), a provider of logistics services. Currently, the stock has a Zacks Rank of #1 (Strong Buy).
Expeditors’ debt-free balance sheet, superior execution, and ability to return cash to shareholders in the form of dividends make it attractive for investment. Over the long term, we continue to expect Expeditors to outperform its competitors, given its superior business platform, limited market share and increasingly complex supply chains.
The company’s second quarter earnings surpassed the Zacks Consensus Estimate and the year-ago quarter level on strong airfreight and ocean shipping demand. Total revenue was $1.5 billion, up 69% year over year, driven by higher airfreight tonnage and ocean container count. Reported revenue was also higher than the Zacks Consensus Estimate of $1.35 billion.
Yields declined despite an increase in air and ocean volumes, which led to contracting gross margins. However, as the freight is recovering, we expect yields to stabilize at lower and more normal levels. We also expect Expeditors to benefit from a slow and steady economic recovery.
Over the last 10 years, Expeditors’ variable cost business model has grown earnings per share organically at a 20.0% CAGR, with a debt-free balance sheet generating returns on invested capital consistently in the 20.0%–23.0% range. The company’s balance sheet remains solid with no debt and cash equivalent of approximately $960.3 billion at the end of the second quarter 2010. This provides Expeditors with flexibility for internal growth.
The company expects to generate strong volumes going forward. But this strength in volumes will come with higher transportation costs, which Expeditors will likely be able to pass on to its customers. The company is poised to grow by gaining market share as well as by expanding its presence in international trade. Expeditors is investing in new opportunities and services, including those in aerospace, pharmaceutical/healthcare, aviation and energy verticals.
Further, Expeditors remains committed to shareholders by paying higher dividends. The company increased its 2010 semi-annual cash dividend by 5.0% to $0.20 per share from $0.19 paid in 2009, representing a dividend yield of 1.00%. This dividend yield is higher than its rival FedEx Corp. (FDX), which is currently yielding a 0.60% dividend but lower than United Parcel Services’ (UPS) current yield of 2.92%.
EXPEDITORS INTL (EXPD): Free Stock Analysis Report
FEDEX CORP (FDX): Free Stock Analysis Report
UTD PARCEL SRVC (UPS): Free Stock Analysis Report
Zacks Investment Research
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