Shipping Without The Ships, Trucks, and Trains
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Moving products around the globe is an expensive proposition. Although many companies in the space spend heavily on their ships, trucks, and trains, Expeditors International (NASDAQ: EXPD) doesn't spend a dime on such things. That makes it an interesting play on an increasingly global economy.
A World of Opportunities
The products you buy in a store often have little stickers that say such things as “made in China” or some other far off land. While we don't think about that too much, it means that someone had to get the shirt, or other item, from China to, say, Kansas. There are only two ways that can happen. Either someone put the shirt on a plane and flew it to Kansas or someone put it on a boat.
But there's no coastal port in Kansas, so if the shirt came by boat it had to be put on a truck or train. If it went by truck, it could go right to the store. If it went by train, it had to be put on a truck once the train got to Kansas. If that sounds like a lot of work just to get a shirt from China to Kansas, it is. There are companies that specialize in getting this done.
Expediting the Processes
Expeditors International is unique in the freight business because it doesn't own any assets. No ships, no trucks, no planes. It works as a middle man, crafting agreements with the companies that have the shipping assets to ensure their fleets are full of goods. On the other side, it helps customers get their wares from the factory to the store without the customer having to figure out the process themselves.
It's been a good business. The company's top line grew steadily between fiscal 2003 and 2011, dropping only in 2009, the tail end of the 2007 to 2009 global recession. Earnings grew steadily, too, dipping only slightly in 2009. Dividends, meanwhile, have been increased annually for more than a decade.
The top and bottom lines, however, both fell slightly in 2012. The continued economic troubles in Europe and the still slow recovery in The United States are largely to blame. However, it is in difficult times that Expeditors' business model shines. Since it doesn't own any of the shipping assets, it doesn't have to pay for their upkeep. That sets a low bar for profitability.
For example, United Parcel Service (NYSE: UPS) has a fleet of over 500 airplanes and 100,000 trucks. That's a big expense. Expeditors' profit margin actually increased a full percentage point between 2008 and 2009. UPS, on the other hand, saw its profit margin contract two percentage points. Both companies remained solidly profitable, but one clearly has a notable advantage when the economy gets tough.
To be fair, UPS has an excellent history of operating its fleet at the highest possible level. That includes spending heavily on system to track and schedule its trucks and planes. This has enabled UPS to keep costs down and profits up. However, Expeditors simply doesn't have to bother with the costs of running a fleet of vehicles.
Note that while these two companies compete, UPS has a big business in home delivery whereas Expeditors focuses on the business to business side. That allows UPS to benefit from growing Internet sales and makes it an interesting investment in its own right. The shares, however, are reaching new highs, so aggressive investors should be looking here right now.
A more direct competitor to Expeditors is UTi Worldwide (NASDAQ: UTIW). However, UTi's profit margins are mired in the low single digits while Expeditors' profit margins are in the high single digits. Those thin margins led to red ink during the recession. Acquisition growth is a big part of the problem here.
While Expeditors has grown largely from within over time, UTi has made more use of acquisitions. Integrating a target's computer systems and staff can be difficult and take longer than liked. As such, UTi has been focusing on streamlining its operations of late to better compete with industry leaders like Expeditors.
Despite losing nearly $1.00 a share in the just ended fiscal year, UTi holds some appeal as a turnaround candidate. If it can improve margins, its asset light business could trend toward the profitability of Expeditors. That would materially improve results. Those seeking a turnaround play might want to take a look.
Getting products from the factory to the store is a big business. Expeditors takes a unique approach and has a long history of growth and profitability, even during tough times. Add in the fact that it has no debt, and the company looks even better. The shares are well off of their highs, but still have solid long-term potential. That could make the current soft spot a nice entry point for growth minded investors.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends United Parcel Service. 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!