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Profits to Rise +20% a Year at Expeditors
International (EXPD) |
Published:
December 16,
2007
I ran across Expeditors International of Washington (Nasdaq:
EXPD, $45.85) recently while screening for companies with superior
returns on equity (ROE). The firm's name might not be the catchiest, but
its business model sure stands out.
The company is a leader in the non-asset-based freight business. In
English, that means that it arranges to have goods transported, but
doesn't actually own the planes, railroads, trucks, or ships that move
those products. Essentially, it acts as a middleman, reserving cargo
space on someone else's fleet and then filling that space with its
customers' merchandise.
The first question you might ask is why those customers can't simply
bypass the middleman and work directly with the shippers. The most
obvious answer is that Expeditors International deals in huge volumes
and can arrange sharply discounted shipping rates, and those savings are
then passed on to its clients. By dealing with an experienced logistics
expert, those same clients also avoid common headaches that arise from
overseas shipping -- letting someone else worry about hassles like
clearing customs and paying tariffs.
Driven in part by surging demand for raw materials in Asia,
international trade has been booming -- leading to eye-popping
triple-digit gains for many dry-bulk shipping firms. Expeditors is
cashing in on this same trend, but without having to make costly capital
expenditures to buy and maintain a fleet of its own. As a result,
returns on invested capital (ROIC) stand at a stellar 23%, nearly double
the S&P 500 average of 12%.
Over the last three years, earnings have nearly doubled from $122
million to $235 million per year, and analysts are expecting profits to
continue rising at a rapid +19% pace for the foreseeable future.
EXPD shares have risen 10-fold over the past decade and currently trade
at generous earnings multiples. However, the company has also grown by
leaps and bounds, is steadily picking up market share, sports the
highest margins in its business, and is the recipient of booming global
trade -- it deserves to trade at a premium.
However, with a fair value of $51, the stock doesn't currently offer the
type of upside potential that would warrant serious consideration just
yet. Still, given its attractive business model and entrenched position
in the lucrative North America to Asia trade corridor, it's certainly
worth watching.Good investing!
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Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority
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