First Quarter Review
Expeditors International of Washington (EXPD), a provider of logistics services, reported first quarter results on May 5, 2010. The company reported earnings of 28 cents per share, in line with the Zacks Consensus Estimate, but a penny higher than last year’s 27 cents per share.
Total revenues increased 31.6% year over year to $1.2 billion, reflecting substantial growth across business segments and geographical presence. While Air and Ocean volumes increased, yields fell dramatically contracting margins. Operating income increased 9.8% year over year to $100.5 million.
The company continues to benefit from slow, but steady economic recovery and inventory replenishment. This is reflected by operating income growth supported by improvements in capacity and pricing. It ended the quarter with a $1 billion of cash on its balance sheet.
(See EXPD Earnings Blog: EXPD In Line with Expectation)
Agreement of Analysts
Following the first quarter results, the overall trend in estimate revisions is inclined towards more positive side for both 2010 and 2011. Of the 16 analysts covering the stock, 7 analysts revised upward while 5 made downward revisions in their earnings estimates for 2010. For 2011, 10 analysts out of 16 revised their estimates upward while only one analyst slashed projections.
Expeditors International of Washington has several positive attributes such as debt-free balance sheet, superior execution, and cash return to shareholders in the form of dividend. We believe these are the primary reasons for upward estimate revision.
The company increased its semi-annual cash dividend to 20 cents per share, up 5% over the previous year. The company expects to take advantage of global economic recovery and the sustained momentum in global trade. It will generate strong volumes going forward, but with higher transportation costs, which it will pass on to its customers.
The negative trend is based basically on the lower yields, which are expected to remain under pressure in the near term, limiting the potential upside to EPS estimates. Further, international trade growth will slow in the future, given moderating industry trends (maturing global outsourcing trends, slower global GDP growth, and fewer industry mergers).
Magnitude – Consensus Estimate Trend
Despite the in-line first quarter results, the Zacks Consensus Estimate moved up 2 cents and 4 cents for 2010 and 2011, respectively, over the last 30 days. The Zacks Consensus Estimate for the second quarter remains unchanged at 30 cents while third quarter estimate increased by a penny. These estimates suggest no surprises for the future.
Our Analysis
Considering the moderate positive estimate revision trends, we are assigning Neutral recommendation with the Zacks #3 (Hold) Rank.
The company is in the early stages of inventory replenishment and global recovery. The continued capacity reductions over the past 2 years and increase in air and ocean freight volumes has created a tight capacity environment, which will act as a headwind for the company.
The improvement in freight volume will lead to increase in carrier pricing and will create margin compression. However, the company will be able to partially offset this pressure with the benefit of improving volume and the ability to pass on the higher carriers rates to the customers.
The company is poised for growth over the long term as it expands its presence and operations internationally and invests in new opportunities and services, including those in the aerospace, pharmaceutical/healthcare, aviation, and energy verticals.
Read the full analyst report on “EXPD”
Zacks Investment Research
