EUR 850.00 For Business Accounts Only

Morningstar | Expeditors Capitalizes on Solid Airfreight Pricing and Healthy Customs Brokerage Growth in 3Q

Wide-moat global forwarder Expeditors International posted 13% third-quarter gross revenue expansion, adjusted for revenue recognition changes affecting the customs brokerage and other segment. Top-line growth came in modestly ahead of our anticipated run rate on greater-than-expected strength in the customs brokerage business. Adjusted operating profitability (EBIT/net revenue) was mostly in line with our expectations. Our midcycle revenue growth and profitability assumptions are largely unchanged, though we expect to boost our fair value estimate in the ballpark of 3% on the time value of money. The stock is trading in modestly overvalued territory, probably due in part to optimism over healthy global trade thus far this year, including solid macroeconomic trends in the United States, 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) of 31.5%-32%, which compares with 30.2% in 2017 and 31% in 2016.

By segment, airfreight gross revenue increased approximately 13.5%, driven mostly by higher sell rates to shippers and increased fuel surcharges. Tonnage grew 1% (roughly 3.5% year to date). In general, global trade remains healthy and airfreight capacity is on the tight side, despite concerns about potential tariff implications. Total ocean gross revenue was up 4%. Ocean freight activity increased 8% (about 5% year to date). Adjusted for revenue recognition changes, we estimate Expeditors’ customs brokerage and other services gross revenue expanded 23%, likely driven in part by continued strength compliance management, transcon (multimodal delivery services), and the warehousing and distribution business.

Expeditors' total net revenue (gross revenue less purchased transportation) increased 10%, slightly below adjusted gross revenue growth due to gross margin compression on ocean business. Lower gross margins probably stem from recent volatility in buy rates paid to ocean liners, which are looking for ways to boost profitability. Total operating margin (calculated off net revenue) fell around 50 basis points to 30.7% due in part to slightly lower ocean net revenue and heightened IT investment in support of future growth. Still, Expeditors remains one of the most profitable providers in the asset-light air and ocean forwarding industry.