Two Logistics Stocks Set to Outperform the Market
Shaun is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world economy is still suffering from the backlash of the 2008 financial meltdown, as well as facing other economic uncertainties. The British economy is worse now than it was in the great depression. China has been slowing down its massive growth, and Russia's economy is experiencing similar slowdowns. Despite all of this bad news, I believe that the world economy is going to improve in the next few years. I'm a big fan of being greedy when others are fearful, and it seems that the IMF agrees with me. In the United states, unemployment is finally starting to shrink, from 9.5% a year and a half ago to under 8% unemployed today. Likewise, with a slight blip at the end of 2012, GDP has continued to rise, and the Consumer Confidence Index has continued to slowly rise since the financial meltdown of 2008. The consumer confidence index is trending upwards in other coutries as well, most notably China.
One way to try and make money off of an improving world economy is to invest in logistics stocks, companies that help move and distribute material for other businesses. These companies often work internationally, and hold an advantage over stocks such as United Parcel Service, because it can take advantage of worldwide growth and recovery. Here, we will look at two of these companies: Expeditors International of Washington (NASDAQ: EXPD), and Seaspan Corporation (NYSE: SSW)
Expeditors International: The poster child of a well run company
Expeditors International runs a large array of logistics services. They are hired by other companies to provide supply chain services, move things through different countries, customer customs, etc. Their customer base is very diverse, with 410 offices spread across six continents While other companies have grown through acquisition, Expediters has been laser focused on growing organically, decreasing margins, and training and retaining it's workforce. It has no long term debt, good and constant cash flow, and, perhaps best of all, an excellent executive team with a sense of humor.
When investors look for an example of a well-run company, often the they turn to Expeditors. I first learned of Expediters was when I was reading commentary on Microsoft's acquisition of Skype for $8.5 billion, after eBay bought Skype for $2.6 billion seven years earlier. This letter in particular by Dan Ferris gives interesting comparisons in how the two companies treat capitol allocation. Likewise, I'd point investor's to Jim Mueller's great article on Expeditors when he bought some for his real money rising star portfolio.
Expeditors may be on a bit of a sale right now. The stock has shed about 10% of it's value from a few weeks ago after the company reported it's 2012 Q4 earnings. In the earnings statement Expeditors showed that, while revenue continued to rise from last year, they experienced a spike in the cost of Air freight faster than Expeditors could adjust their rates to compensate. Expeditors always looks expensive; after all, you are paying for the great management and business with a price to earnings ratio of around 25. But I believe this company will outperform the S&P over the next 5 years. I would recommend buying on a dip.
Perhaps a better option to buying stock outright would be to write slightly in the money puts. While I like the company, I don't think Expeditors will shoot to the moon in the next few months. The $40 May 2013 put looks especially good, paying around $3. This would either give you the obligation to buy one hundred shares of Expeditors at the adjusted price of $37, or make about a 30% annualized gain on your capital at risk, depending on if Expeditors is above $40 or not in May.
Seaspan, Who knew boat rental could be so lucrative?
Seaspan is an interesting contradiction to Expeditors. Expeditors is a global company, engaged in several forms of logistics, including shipping through air, sea, and land, and distribution. It has no debt, and a long history of excellent operation. While Expeditors hosts a multitude of services, Seaspan focuses on leasing sea transport, owning 72 cargo ships. As you might expect, large cargo ships can be expensive, and Seaspan financed their ships with about $3.75 billion in debt. This use of leverage is common in the transportation industries, and Seaspan appears to be doing very well in generating enough cash to pay it off, as revenue for this company has tripled over the past five years. Seaspan relays on long term charters to generate and plan for it's revenue The company has, in general, been very smart about it's operations, buying ships when they know they have enough business for them, selling older ships when the market is good, and in general, returning shareholder value through a high dividend while being able to pay off their substantial debt.
Seaspan generally increases it's dividend substantially in the beginning of the year. In 2010, the dividend per share was $0.52 per year; in 2011, the dividend per share was $0.76 per year; and in 2012, the dividend is $1.00 per year. Many people watching the company, including The Motley Fool's Jim Royal, believe that a large dividend increase will again happen this year.
Seaspan has been on a bit of a tear recently, and if it reports a good quarter for 2012 Q4, set to be released March 5, the current price of around $19 could be justified. However, the high debt, particularly with the high dividend, makes me nervous. While I enjoy the dividend, as a long term shareholder, I wish that money was used to pay down or reduce debt (being payed at 9.25% interest!) instead. That being said, I believe that Seaspan will continue to outperform the S&P 500, but please take only a moderate position in Seaspan if you chose to buy it. The high debt scares me a little bit.
A rising tide lifts all boats--particularly companies that rent out.. um... boats?
Both of these logistics companies are well run, handled the recent recession well, and in my opinion are set for dominance when the world economy improves in the next few years. I would recommend Expeditors as a very safe company, which has a rock solid financial sheet and amazing management, and Seaspan as a riskier but higher potential reward (and high dividend) play into growth in shipping from China. I predict both will outperform the S&P 500 over the next five years.
Flyingwhale is long SSW, long $35 Jan 2015 EXPD calls, short $45 Jan 2015 EXPD puts, and short May 2013 EXPD $47.5 calls. The Motley Fool recommends Seaspan and United Parcel Service. The Motley Fool owns shares of Expeditors International of Washington and Seaspan. 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!