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On the move
Expeditors is widely admired. Built up from scratch by Peter Rose in the early 80s, it has been known for its customer service – and customer retention– but is its vice-like grip on its business beginning to loosen?
One competitor told The Loadstar: “Expeditors is one of two companies we were always up against and were very difficult to crack. It held its accounts for decades – based on price and service – and you just couldn’t beat it.
“But in the past couple of years, those accounts have become fair game and they are taking our calls. It’s been a surprise.”
Mr Rose announced his retirement last October and left the company in March, although he remains as chairman until May.
Expeditors’ shareholders have not enjoyed the ride since Mr Rose’s announcement. Its stock price has stuck at $43.70, where they traded back then. But in truth, the stock performance of Expeditors has been hardly satisfactory since mid-2011.
As far as capital allocation goes, additional stock buybacks and a higher payout are earnings-accretive options, rather than value-accretive solutions.
There are alternatives, and two obvious questions which must be addressed: is a change of ownership on the cards? And, will Expeditors become more aggressive in its mergers and acquisitions (M&A) strategy?
A takeover of Expeditors would be a difficult deal to pull off, and is an unlikely option. It’s obvious, however, where deal-making may occur if Expeditors decided to embark on M&A – and that goes to the heart of its core services business.
In 2013, Expeditors set up a customer solutions centre at its corporate office, which, the company said, would give it the opportunity to demonstrate its “information technology capabilities to customers, carriers and investors”.
“Exceptional” customer service is the stated goal, and Expeditors has proved to be particularly good at this over the years.
There is no need for a drastic change in corporate strategy. Debts and M&A are not in Expeditors’ DNA, yet in order to grow net revenue and profits at a faster pace, debt-funded M&A shouldn’t be ruled out. Bolt-on deals in the IT sector would give Expeditors greater technological capabilities at a time when shippers are looking to optimise global supply chains through more advanced IT solutions, and would likely help the company’s share price appreciate.
Essentially, it could raise cheap financing for a number of things from buying fixed assets to acquiring companies.
Vertical integration of services has become of paramount importance in this environment, and targeted acquisitions could increase the diversity and value of the services Expeditors offers existing customers, as well as bring in new clients. In this context, possible targets in Asia are likely to be on the radar.
More broadly, such a strategy, if properly executed, would also help it to better manage and optimise customer supply chains – especially given that the sort of blue-chip corporates that make up Expeditors’ customer base are, in general, looking to outsource ever larger portions of their supply chains.
“The support we’ve cultivated with our long-term carrier partners over the years allowed us to create and execute the kinds of flexible solutions our customers required to keep their supply-chain stable, despite operating in an unstable supply-chain environment,” Expeditors said in its annual report.
Double-digit growth in air and ocean freight volumes has provided a helping hand, as quarterly results released this month show (despite a 3% fall in net revenue per kg in the first half, and ever-decreasing yields), but medium-term trends remain uncertain after four difficult years for air and ocean freight.
Expeditors should keep its net leverage low due to the cyclical nature of the freight forwarding and customs brokerage businesses, but equally, there’s no reason why the company should be debt-free.
The company boasts a net cash position of about $1bn, a sizeable warchest, but it also means that its balance sheet is highly inefficient and could be easily levered up. In addition, it’s also unclear what benefit a public listing brings, and market sources have told The Loadstar that private equity is sniffing around the company.
An even more interesting option would be a management buyout backed by a lowly 30% debt portion. But there are problems with that. The shares look fully valued and are pretty expensive, based on trading multiples versus fundamentals.
This is part of the problem of Expeditors as a takeover target. Cultural barriers may prevent a smooth integration of acquired assets, and Expeditors is already a very efficient machine. Operationally, any buyer would struggle to improve performance and exploit cost synergies, while Expeditors’ underlying profitability is a benchmark in the industry. The accounts tell a story of an incredibly solid business – financially, economically, operationally.
Still, unless a buyout or a more aggressive strategy targeting higher returns on invested capital happens, there would appear to be little incentive for shareholders to stay invested in the next 12 months or so.
Additional reporting by Alex Lennane
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