I placed the Value-Line for EXPD here http://wp.me/p2OaYY-1O6. Just click on the link then download from the link EXPD_VL in the post. If you haven’t done the valuation exercise do it now then you can compare with my brief thoughts. What would you pay?
I always go to check the pulse of the company—the return on total capital and return on shareholders’ equity. Both have averaged 20% over the past 10 years with excellent stability and no debt. I then glance at the balance sheet and see $1,367 in cash assets. Subtract uncapitalized leases of $45 million (as debt) then round down to $1,300 in cash then divide by 208 mil. shares to show $6.25 per share in excess cash. Let’s just say $6.00. The core business is quite profitable if it earns 20% returns on capital while holding $1.3 billion in cash.What will management do with that cash?
Sales have steadily risen since 1997 at about 9% per year until 2009 and then growth has dropped to 5% to 6%. But what is striking is the drop in sales in 2008 of $26.58 per share down to $19.30 in 2009—a drop of 27%while operating margins held steady at 10.5%. This business can adjust quickly or it has a high degree of variable costs. I am impressed with how this company remained profitable through the financial collapse. This is a question I should ask and answer through a visit to the 10-K and 8-Ks. This company provides a case study in how management looks at its business vs. Wall Street’s view. Read several years of the company’s 8-K filings. Go here: http://www.investor.expeditors.com/public-disclosure/2013/index.asp
The business seems asset light, so perhaps the source of competitive advantage is economies of scale through network effects. Try to uncover the source of the company’s competitive advantage.
Management owns 2.3% of this $8.5 billion dollar company so they have skin in the game. Good. Always be aware of incentives. Management has said that they may pursue share buybacks at current prices. Outstanding shares are slightly declining.
Cash flow has been steady and capex seems to be low. For 2013, $2.05 in “cash flow” (this cash flow is EBIDA but after taxes) then we deduct the $0.40 in capex to arrive at $1.65 in free cash flow. I place about an 11% cost of capital with about 4% to 5% growth so $1.65/(11% -4%) = $23.50 or $27.50 if I use a 5% growth number. This business grows with world trade since it is a logistics business.
Now we add back the excess cash in the business $6 to arrive at a value of $29.50 to $33.50. A 20% to 30% discount would put me at $27 to $23 to be a buyer of this business. I can’t expect more of a discount for such a stable, high return business—though subject to cyclical risks. Today (April 3, 2013) EXPD seems reasonably priced at $35. Watch and wait while getting answers to my questions.