Second-quarter results published by Expeditors last week confirmed recent quarterly trends after a record year for profits.
Turnover figures were a touch light, but strength in earnings and underlying margins was visible. Its earnings power is arguably the most important factor at this point in the business cycle, given a mixed outlook for air and ocean freight volumes, as well as strong investor appetite for yields.
On top of that, there appears to be little risk associated to the current environment of low interest rates, given that, as Expeditors said, “a hypothetical change in the interest rate of 10 basis points at June 30, 2016 would not have a significant impact on the company’s earnings.”
“In management’s opinion, there has been no material change in the company’s interest rate risk exposure in the second quarter of 2016,” it added.
Unsurprisingly perhaps, its shares rose to a multi-year high of $52.58 on August 2 when its trading update was released – a performance that was justified by high-quality earnings and rising dividends.
In the first half of the year, Expeditors paid out a total of $73m in dividends, up 6.2% year-on-year. A conservative payout ratio – which stands at about 30% on a trailing and forward basis – is reassuring and further suggests that sustained growth rates for dividends are likely, especially in the light of more subdued stock buyback activity in recent times. As a reference, it spent $166m on share repurchases in the first half of the year against $205m one year earlier.
Rising operating cash flows and a low capex-to-sales ratio at about 1% backs its rich free cash flow yield, estimated at between 6% and 7% on a full-year basis. Moreover, its balance sheet is rock-solid, given a net cash position of almost $1bn.
Expeditors is prepared to face possible exogenous risks – as it admits, it is “dependent on the financial stability and operational capabilities of the carriers it utilises”.
“Over the last two years, airline profitability has improved, although many air carriers remain highly leveraged with debt,” it noted.
“Moreover, the ocean steamship line industry has incurred substantial losses in recent years, many carriers are highly leveraged with debt and certain carriers are facing significant liquidity challenges,” it pointed out in its trading update, adding that this situation has required it “to be selective in determining which carriers to utilize.”
In a market where operational excellence defines Expeditors’ core offering and strategy, the forwarder is more likely to be predator than prey in the M&A arena, particularly if the right opportunity emerges, although acquisitions are not in its DNA.
Quarterly revenues from air freight services were $582m against $693.8m one year earlier, while ocean freight sales stood at $464.6m versus $567.7m year-on-year, but the fall in its top-line was offset by lower operating costs, yielding a marginally lower EBIT of $178m, down 2.1% year-on-year.
Air freight tonnage rose 2% in the second quarter but was down 4% in the first half of 2016, while ocean freight volumes fell 1% and 2% in the second quarter and first half of 2016, respectively.
Source: Transport Intelligence, August 9, 2016
Author: Alessandro Pasetti
