Morningstar | Expeditors’ 2Q Airfreight and Customs Brokerage Trends Solid, but Ocean Freight Wavy. See Updated Analyst Note from 07 Aug 2018
Wide-moat global forwarder Expeditors International's second-quarter gross revenue grew 14% when adjusted for revenue recognition accounting changes in the customs brokerage division. Top-line growth came in modestly ahead of our expected run rate on greater-than-expected strength in customs brokerage business and airfreight business, partly offset by weaker-than-anticipated ocean freight volume. Adjusted operating profitability (EBIT/net revenue) came in modestly shy of our forecast, likely because of softer core ocean freight net revenue.Since our longer-term midcycle revenue and margin assumptions remain mostly intact, we are maintaining our $57 fair value estimate. That said, the stock is trading in modestly overvalued territory, likely due in part to optimism over healthy global trade, including solid macroeconomic trends in the U.S., which drives import activity on key trade lanes. Behind our fair value estimate, we believe Expeditors can generate 5%-6% average annual net revenue growth over the long run, as benefits from the network effect support modest market share gains in a highly competitive marketplace. We are baking in a midcycle operating margin (calculated off net revenue) in the ballpark of 32%-32.5%, which compares with 30.2% in 2017 and 31% in 2016.
By segment, airfreight gross revenue increased 19% on the back of 4% tonnage gains (5% last quarter), increased fuel surcharges, and higher sell rates to shippers. In general, global trade remains healthy, despite trade war rhetoric, including U.S. and Europe import trends. Total ocean gross revenue was relatively flat, as we suspect the firm pulled back on volume because of pressure on gross margins stemming from volatile ocean carrier pricing. Ocean freight activity increased only 1%, versus a much stronger 5% year-over-year gain in the first quarter. Adjusted for revenue recognition changes, we estimate Expeditors’ customs brokerage and other services gross-revenue expanded more than 20%, likely driven in part by continued strength in compliance management, transcon (multimodal delivery services) and warehousing and distribution business.
Expeditors' total net revenue (gross-revenue less purchased transportation) increased 14%, roughly in line with gross revenue growth--when adjusted for the impact of revenue recognition changes, we estimate total gross margin was roughly flat at 33.7%. Airfreight gross margins were up 30 basis points, and gross margins on ocean services increased roughly the same. That said, when excluding the impact of order management business (which grew nicely in the quarter), we suspect underlying ocean freight gross margins fell because of volatile buy rates paid to carriers. We calculate adjusted customs brokerage and other gross margin fell 240 basis points, likely because of mix changes. Adjusted for non-recurring fee recoveries last year, total operating margin (calculated off net revenue) improved 120 basis points, to 28.6%, driven by higher airfreight net revenue and solid customers brokerage services growth, along with solid cost execution. Expeditors remains one of the most profitable providers in the asset-light air and ocean forwarding industry.
Expeditors International of Washington provides global logistics services. As a third party logistics provider, the company purchases cargo space from carriers (such as airlines, ocean shipping lines, and trucking lines) on a volume basis and resells that space to its customers. The company provides a range of transportation services and customer solutions, such as customs brokerage, order management, transportation, warehousing and distribution, transit, cargo insurance, cargo monitoring and tracking, and other customized logistics and consulting solutions. The company's Project Cargo unit handles special project shipments that move via a single method or combination of air, ocean, and/or ground transportation.
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