The Outlook for Expeditors and Two Other Logistics Firms
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A few companies in the broader shipping / logistics industry, but with nontraditional operating strategies, look appealing right now, albeit for different reasons. Specifically, the first, Expeditors International of Washington (NASDAQ: EXPD) is a long-term growth story that presents a current buying opportunity. The second, GATX Corp. (NYSE: GMT), has experienced a revitalization over the past couple of years. Finally, Forward Air (NASDAQ: FWRD)is a niche company benefiting from a current market trend.
Let's take a look.
One of the most impressive aspects of a company is when it can grow its profitability year after year regardless of operating conditions. This has been true of freight services provider Expeditors International, with a few anomalies.
2012 was one of those setbacks and it will be interesting to see if profits regain momentum in 2013 and afterward. The reasons EXPD’s income has been so consistently on the rise has very little to do with expansion of the asset base. It benefits from market share expansion and improved yields on shipping capacity purchases, utilizing resources for sales as well as the seeking out of favorable opportunities.
EXPD’s non-asset based operating model allows for limited earnings volatility. Its challenges this year have stemmed from a combination of reduced airfreight volumes and pricing erosion, factors often incongruent that allow for steady profit gains. Management attributes the demand drop to weakness in key industries it serves and a lighter weight mix of modern electronics products.
Along those lines, we believe the company will adjust, helping to bring “buy” prices down and “sell” prices up on cargo space. As such, given also stability in its ocean services business, a top- and bottom-line rebound could well occur. The shares, historically commanding an elevated P/E ratio due to the firm’s steady nature, may well thus have significant upside into 2013 and over the long haul.
GATX is a stock that can potentially gain steam in the near term, too. The railcar leasing company has put together a nice string of earnings gains since June of 2011 without a corresponding advance in the share price.
Fueling GATX’s profit upturn has been a resurgence in lease rates, a metric that climbed a whopping 26% year over year in the September 2012 quarter. Management’s previous strategy of keeping lease terms on new contracts shortened has allowed it to renew such deals again at much more favorable pricing. It is once again extending term lengths, possibly allowing it to settle in for ongoing earnings growth given utilization hovering near 100%.
If GATX’s American Steamship Company (ASC) unit, specializing in marine shipping, continues to benefit from higher iron ore tonnage, this would further accelerate the rate of profit advances. This year, ASC’s profit comparison has benefited partly from a labor stoppage last year. GMT shares are held back somewhat by the company’s lofty debt-to-equity ratio. They may provide above-average appreciation for both near and long-term investors.
Forward Air is a company well-positioned to benefit from a current trend in the shipping market. The trade down from air cargo to ground is restraining profit growth at major delivery firms, such as FedEx. Forward Air fills this void, through its deferred-air ground transportation network.
FWRD’s core airport-to-airport revenues are running higher, having likely increased 5% to 8% in the December quarter. It implemented a rate hike in September and is seeing gains from an upstart “Complete” pick-up-and-delivery service. Curbing the bottom line somewhat, though, has been a disproportional rise in purchased transportation costs. Management should bring these costs that stem largely from a less favorable customer mix under containment, allowing margins to stabilize and earnings to grow nicely in 2013.
Looking at Forward Air’s long-term prospects, the same factors ought to drive profit advances. It has historically capitalized not only from improving economic conditions, but also shippers aiming to reduce freight costs. The strong balance sheet is another positive aspect, and FWRD may well be in the market for tuck-in acquisitions that further expand its range of services. FWRD shares are worthwhile as either a near- or 3 to 5-year selection.
dctotal has no positions in the stocks mentioned above. The Motley Fool owns shares of Expeditors International of Washington. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!