Uncertain Times Will Test Expeditors International

Expeditors International (NASDAQ:EXPD) is an uncommonly well-run company and that has led to some pretty healthy valuation multiples over the years. Now, though, investors are worried about what a new administration in Washington, D.C. could mean for international trade, not to mention concerns about shrinking margins in both the air and ocean freight businesses and ongoing investments intended to drive future market share growth.

Expeditors is more or less what seems to pass for cheap now; it's not all that cheap on an absolute basis, but it's at least reasonably priced. That said, there are meaningful uncertainties regarding the company's operating environment right now and this recent run of underperformance (six straight quarters below expectations on revenue, three on EPS) may continue a while longer. Along those lines, Expeditors' asset-light, conservative model does well in tougher times but improvements in underlying transportation/shipping markets could favor asset-heavier companies and less well-run operators that may see more margin leverage in any sort of upturn.

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Uncertain Times Will Test Expeditors International

Investopedia: UTi Worldwide Still A "Hurry Up And Wait" Story

This has been an unimpressive stretch of market performance for big freight forwarding companies like Expeditors International (Nasdaq:EXPD), Kuenhe + Nagel (OTC:KHNGY), and UTi Worldwide (Nasdaq:UTIW). Global trade has slowed pretty significantly, with major Asian air cargo terminals reporting scant (if any) growth, and likewise weak inbound freight figures for U.S. ports. In a roundabout way, maybe that's not so bad for UTi Worldwide, as this company tries to deliver on a multi-year turnaround strategy. If you're going to deliver uninspiring results, it may as be when investors aren't terribly keen on the sector.

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Investopedia: UTi Worldwide Sees A Relief Rally

Investors in freight forwarder UTi Worldwide (Nasdaq:UTIW) certainly had little reason to be optimistic going into second quarter earnings. With ocean freight rates pressuring margins and air cargo demand falling, earnings expectations had been drifting lower for weeks. Then when FedEx (NYSE:FDX) warned of a disappointing quarter it was not hard to think that investors were bracing themselves for this report.

Consequently, when UTi Worldwide reported a quarter that wasn't all that terrible on Thursday, the stock enjoyed a good pop. Although the stock remains undervalued on a long-term basis, it's going to take real improvement in the underlying markets (and not just relief rallies) for this stock to work.

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Investopedia: FedEx Still Getting A Pass

Even after all these years, I find it interesting to see which stories analysts and investors are willing to believe in, even when the fundamentals don't always support that belief. I don't believe that anybody seriously questions that FedEx (NYSE:FDX) is a well-run business, or that it would be very (if not prohibitively) expensive to replicate the infrastructure that it and rival UPS (NYSE:UPS) have built.

By the same token, the company has had a hard time producing a truly impressive return on invested capital, and the company's free cash flow generation capabilities have always been limited--maintaining that network of planes, trucks and so on takes a lot of capital. Looking at the company's fiscal fourth quarter earnings, it looks like investors are willing to give the company another pass--margins and volumes were not that exceptional (nor was guidance), but the performance wasn't as bad as the results of other transportation and logistics companies might have suggested.

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Investopedia: UTIW Suffering Along With The Rest Of Logistics

These aren't great days in international logistics. Airfreight companies like Atlas Air (Nasdaq:AAWW) and Air Transport (Nasdaq:ATSG) aren't having the easiest time of it, and data from the likes of IATA, HACTL and Cathay Pacific haven't been great either. Conditions on the sea are marginally better, but the economic conditions in Europe, China and (increasingly) other emerging markets are taking its toll on international traffic.

Against that backdrop and weak numbers from fellow forwarder Expeditors International (Nasdaq:EXPD), UTi Worldwide's (Nasdaq:UTIW) miss is not entirely surprising. While the company is showing some definite margin benefits from its restructuring efforts and revenue wasn't that bad net of FX movements, these numbers still aren't going to help the stock, those of other companies like FedEx (NYSE:FDX) or UPS (NYSE:UPS) nor sentiment on the global economy.

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Investopedia: UTi Seems To Be Pricing In The Bad News

As investors increasingly fret about the health of the global economy and the likelihood of another recession, the transports have started to flash some warning signs. Railroad companies like Union Pacific (NYSE:UNP) and CSX (NYSE:CSX) have seen carload traffic slow, while drybulk and container shipping companies see rates carve out new bottoms.

Curiously, the stocks of asset-heavy companies like rails and air freight have held up better than many of the asset-light logistics and freight-forwarding companies. That seems to be particularly true for UTi Worldwide (Nasdaq:UTIW). While margins and competition have long been a bear story for this supply chain service provider, investors may wonder if the stock's relatively poor performance within the transports is a sign of bad news to come or an opportunity for a relative value call.



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Investopedia: The Logic Of Logistics Stocks

A great deal of ink is routinely spilled on the virtues of inventing a better mousetrap or finding a better way to make that mousetrap. It is less common, though, to see the same attention given to figuring out better ways to get those mousetraps onto store shelves. While most investors are likely quite familiar with the railroad and trucking industries, and their links with a recovering economy, the same may not be true for those companies that specialize in third-party logistics and serve as intermediaries between the producers and shippers.

To that end, then, it is worth exploring whether the logistics industry is a good investment destination in today's market.

The Industry
As a very simplified explanation, these companies thrive by stepping between shipping customers and shipping providers and making life easier for both. Handling the logistics and shipping can be a major headache for companies, particularly smaller operators, and shippers can charge punishing rates for deliveries that are inconvenient or inefficient for them. On the other hand, transportation companies really do not relish the headaches and hassles of dealing with thousands of customers and having to tend to their specific needs.

Enter the third-party logistics specialists. These companies can not only consolidate shipments and negotiate bulk discounts, but they can handle many of the details that bedevil smaller customers. On the flip side, they offer the large rail, trucking and freight concerns a large consistent customer with a thorough understanding of the business and a minimal need for hand-holding. Producers save money, transporters save money and the companies in between make money.

The Companies 
C H Robinson Worldwide (Nasdaq:CHRW) is the largest domestic truck broker in the U.S., and gets about three-quarters of its revenue from truck brokerage. The company is also looking to expand into the growing international air and ocean freight forwarding business. This should reduce some of the cyclicality of the business.

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UTi Worldwide - Still A Name To Play In Freight

For the most part, the transports have all responded well to the bounce in economic activity. Railroads like Union Pacific (NYSE: UNP) and Canadian National (NYSE: CNI), package handlers like UPS  (NYSE: UPS) and truckers like Old Dominion (Nasdaq: ODFL) have all rebounded solidly over the past year or so. Then there is logistics specialist UTi Worldwide (Nasdaq: UTIW). Although air and sea-going traffic have picked up, this stock has not gone along for the ride with the rest of the transports. 

Does this make it an underappreciated bargain, or is there a reason it should be a laggard? Let us investigate.  

The Quarter That Was
There were definitely signs of life in UTIW's quarterly report. Gross revenue rose 37%, though that dropped to 12% net revenue growth due to higher transport costs. Interestingly, air freight and ocean-going revenue were more or less equally strong at the gross revenue level, with 55% and 48% growth, respectively. Logistics and distribution revenue growth was lighter, though, at about 14%, and the company seems to be having a bit of trouble passing on rate increases.  

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