We are downgrading our long-term recommendation on Expeditors International of Washington’s (EXPD), a third-party logistics provider, to Neutral from Outperform on contracting gross margins. Currently, the stock has a Zacks #3 Rank (Hold).
The company’s third quarter earnings surpassed the Zacks Consensus Estimate by 3 cents and the year-ago earnings on strong volumes. Reported revenue was also higher than the Zacks Consensus Estimate. Despite an increase in air and ocean volumes, gross margin (yield) declined to 27.5% in the third quarter from 33.4% in the year-ago quarter. However, with a recovery in freight, we expect yields to stabilize over the coming quarters.
Expeditors’ had a strong balance sheet with no debt and $1.1 billion in cash as of September 30, 2010, which is encouraging in our view and provides flexibility for internal growth.
The company remains committed to shareholders in the form of dividend. At the beginning of 2010, the company increased its semi-annual cash dividend by 5.0% to 20 cents per share from 19 cents paid in 2009, representing a dividend yield of 0.76%. This dividend yield is higher than its rival FedEx Corp. (FDX), which is currently yielding 0.55% dividend but lower than United Parcel Services’ (UPS) current yield of 2.72%.
Over the long term, Expeditors plans to expand its presence and operations internationally as well as invest in new opportunities and services. Further, ongoing operating efficiencies and the company’s ability to pass on the higher rates to customers will drive profitability.
On the flip side, Expeditor does not own transportation assets, and thus its dependence on asset-based transportation providers might hinder its profitability in the long term. Additionally, there is intense competition in international air and ocean freight forwarding as well as customs brokerage.
We believe Expeditors’ debt-free balance sheet, superior execution,and ability to return cash to shareholders in the form of dividends make it attractive for investment. However, contracting gross margins, tight capacity and competitive threats make us cautious on the stock for the long term.
EXPEDITORS INTL (EXPD): Free Stock Analysis Report
FEDEX CORP (FDX): Free Stock Analysis Report
UTD PARCEL SRVC (UPS): Free Stock Analysis Report
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