Analysis: friendly 'Trump trade' boost for unfriendly Expeditors?
Offsetting adjustments
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“Expeditors has long believed that it is a competitive advantage to focus on organic growth and to utilise an enterprise technology platform designed and built by logistics technology professionals for logistics professionals.” (Expeditors, 2018 annual report)
After Denmark’s DSV reported another set of outstanding results last month and Switzerland’s Kuehne +Nagel, unsurprisingly in my view, disappointed the market last week, Expeditors recently showed the industry where its strengths and weaknesses lie.
It is pretty tough out there for most firms, but judging by ...
Comment on this article
Michael Pruden
March 05, 2018 at 6:53 pmTarget of XPO maybe?
XPO said they want to do some M&A this year. Currently their forwarding business is tiny compared to their other segments. Expeditors might fit in nicely.
Ale Pasetti
March 05, 2018 at 9:56 pmHi Michael,
That’s great feedback, thanks very much. Yes, XPO is nowhere close to the main players in FF, but is that the way forward? Well, I guess so, considering core margins accretion for the combined entity if XPO were to team up with EXPD. My first shot is it would have to be structured as a merger “of equals” on paper, with XPO in the driving seat, taking, say a 66-73% stake in the combo and paying out a nice special dividend to EXPD shareholders (say a lump sum of between $2bn and $4bn) to convince them a deal is in their best interest at a time when shares out are at all-time lows and buybacks are v expensive — re your comment, “might fit in nicely” with regard to any specific unit(s), in your view?
Synergies could be minimal, IMO, in many areas of business — which plays against a XPO/EXPD tie-up, on a preliminary basis — but there could be a story of deeper vertical integration of services (EXPD’s offering/transportation services in NA would bulk up thanks to XPO’s freight brokerage, LTT, LM, FT, and there could be some obvious overlap elsewhere.)
As I wrote on another platform, assuming a constant free cash flow yield, and based on its FCF flow guidance, XPO’s market value could more than double to $25bn by early ’19. I looked at DSV/XPO previously, but I haven’t thought of XPO/EXPD because I am inclined to believe XPO would want to fetch a significant premium (in terms of relative value) in any negotiations, which is implied in its fwd trading multiples (vs EXPD and others), and also XPO could be much more attractive as a target than a buyer. Either way, one to watch (it just hit another record high at over $101).
Thanks again.
Best,
Ale
Thomas Bradley
March 09, 2018 at 11:43 pmAlthough your analysis has some technical merit, this would be the most un-Expeditors thing ever. Jeff Musser started as a messenger at Expeditors and he’s married to Peter Rose’s daughter. Simply to say, he was mentored by Peter for 3 decades essentially. He’s as firm a believer in the idea that M&A is a bad idea in this industry from a service standpoint. It’s always a bit of a disaster and the customers suffer.
In my opinion, the chances of something like this happening are less than 5%. It’s just not in their DNA.
Ale Pasetti
March 11, 2018 at 8:27 amHi Thomas, thanks much for your insight, much appreciated!
Some marriages work, others don’t. And then who knows if Mr. Musser will be there this time next year or the year after — point being, a financial sponsor needs to retain some key existing managers, and then move on with or without Mr. Musser, although I think he could be the right man to lead EXPD under a different ownership.
Re: “This would be the most un-Expeditors thing ever” — yes, of course, and I think I acknowledged that in the first three paragraphs of this story, as well as previously elsewhere on this platform.
“In my opinion, the chances of something like this happening are less than 5%. It’s just not in their DNA.” — could be even lower than 5%, I agree, and this is a problem shareholders could do without. Re its DNA, see my comment above.
“M&A is a bad idea in this industry from a service standpoint. It’s always a bit of a disaster and the customers suffer.”
That clearly doesn’t take into consideration corporate stories where existing management teams know how to manage integration and execution risks in M&A. Are you thinking of CEVA and Toll Holdings maybe?
How about DSV and XPO instead, who have created about $15bn of additional, combined market value in the past two years?
I do not think this analysis has some technical merit, as you say, because this analysis clearly shows, in my humble opinion, the benefits of applying some financial engineering to boost returns (likely, and this is the best part, “without having to do much work”) after years of lagging performances, on a relative basis (see the chart 1 above). Let me also add that the FF/C environment Peter Rose lived in is very different from today’s world, and if the price is right, I understand, many EXPD shareholders would love to take the money and run!
Best,
Ale
Charles M
March 17, 2018 at 12:49 amHello Ale,
I am inclined to agree with Thomas Bradley above. This analysis is quite strong technically, and you very clearly state a strong case. The problem is cultural. Expeditors is not for sale. Past and current management don’t necessarily care about the stock price or the market cap. They are basically allergic to financial engineering, and will not take actions specifically designed to increase the share price.
You state that this aversion to financial engineering is “a problem shareholders could do without”. I’m not sure EXPD management gives a hoot what shareholders care about. The focus is 100% on their people, their customers, and their market share. Market cap is a byproduct, not a goal. Management is compensated more with cash profit-share payouts than stock options. They have been explicit about this for years, and Wall Street just refuses to take them at their word.
Ale Pasetti
March 19, 2018 at 12:05 pmThanks Charles, your feedback is much appreciated.
You are thinking of it as a corporate man, rather than a finance guy, so I think your premise is debatable because you are looking at a different side of the story.
Re: “Expeditors is not for sale.”
All public companies can be sold (look at the ~ 100% free float), by definition. It’s just a matter of price and how many years of growth any proposal would buy. Five years will be enough for EXPD, assuming constant trading multiples. The market cap, in isolation, is a somewhat meaningless metric (even more so with EXPD, given that it’s bought back stock at a fast pace in recent years).
Re: “They are basically allergic to financial engineering, and will not take actions specifically designed to increase the share price.” I’d personally add “until shareholders are no longer happy with that”.
But overall, what you’ve written is not accurate, because management has used a lot of financial engineering to boost EPS artificially via buybacks in the past decade or so (wasting millions during certain periods of time under Rose).
https://tradingeconomics.com/expd:us:common-shares-outstanding
So, I think we agree EXPD is a public company (fact), owned by its shareholders (fact), and if it receives an offer the board will have to acknowledge it (fact), given its fiduciary duties (fact), right?
Then the board can say “no way”, and then, I imagine, the suitor could turn hostile and go directly to the shareholders, and EXPD will be sold.
You need a different corporate structure to prevent a takeover, it’s as simple as that.
Is a change of ownership going to happen? I don’t know.
Would it be in the best interest of shareholders if its CEO were involved? Yes.
But PE firms do not need Mr Musser, so he might be out of work sooner rather than later if a traditional LBO (rather than an MBO) emerges.
My 2 cents.
Thanks very much for your comment.
Best regards,
Ale
Jacob Smith
March 21, 2018 at 11:43 pmI strongly agree with the Charles and Bradley. In the end, the only way this ever happens starts with a hostile takeover. Anyone who truly knows Expeditors knows the leadership understands their legacy will be forever tarnished if this happened under their watch. They have way too much pride to go down that path voluntarily. Almost all of the leadership has been with the company well over 20 years, most over 30. Many of them have children/family that also work for Expeditors. Short of a hostile takeover, there is 0.00001% chance this happens. Anyone who disagrees with this assessment simply doesn’t know Expeditors. 10 years from now? Who knows?
Ale Pasetti
March 22, 2018 at 10:09 amJacob,
I think you remember the headlines in 2014, right?
“Rose quits as Expeditors chairman amid signs of investor unrest”
https://www.seattletimes.com/business/rose-quits-as-expeditors-chairman-amid-signs-of-investor-unrest/
I have covered EXPD for years, so I understand your point — loud and clear. However, what you should also acknowledge is that shareholders are in the driving seat, not management. And Mr Musser has a great opportunity to be part of the changes that I foresee, or he can just retire happy and rich.
A decade? Ah, it might take less than three years to witness significant changes in the board and shareholder structure, so I guess we’ll talk then.
Best,
Ale
(PS: how did you come up with that 0.00001% chance of a takeover happening?)
Joshua Smith
March 22, 2018 at 4:07 pmHa ha… 0.0000001% is a mathematical way of saying “nada”. The problem with a takeover is that there’s probably about 15-20 top level people (if not more) who are more than rich enough to not hang around. Then what do you have? Other LSP’s don’t have this “problem”. Basically, a takeover would effectively end Expeditors in the sense they’d become just another forwarder.
I also remember something Peter Rose told us investors as well — “…Rose replied, “What hostile takeover? We would be about as easy for an outsider to digest as a porcupine.”
Btw, I truly appreciate your feedback and responses.
Ale Pasetti
March 22, 2018 at 5:14 pmJacob,
I really appreciate your comments and insight and I am glad I reached the same conclusions about that 0.0000001% rate!
Good quote, too — that is the reason why I believe the involvement of existing management is necessary. We’ll see how it goes… Goldman recently pointed out that option prices indicate that CHRW could be another target (same applies to XPO), so there is plenty of speculation in the marketplace about a possible change of ownership for some of the market leaders in the supply chain in the US (possibly also driven, I am told, by e-tailers).
I’ve been on calls over the past two weeks and the feedback I received was inspirational, so I’ll have some more thoughts coming on the EXPD story either before or after Easter. I’ll make sure I’ll incorporate your take, as well as Charles’ and Thomas’.
Hope you’ll find the time to share your views again on my upcoming story.
Thanks again.
Best,
Ale