Expeditors International of Washington, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 5/5

Expeditors International of Washington, Inc. is a non-asset-based global logistics services provider, operating through a worldwide network of offices and exclusive or representative agents.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Expeditors International of Washington (EXPD) operates a global logistics network, acting as a middleman in the shipping industry and connecting shippers with carriers without owning the transportation assets. It primarily operates through air freight, ocean freight, and other services (such as logistics, warehousing, etc.).

Business Overview

Expeditors International is a global logistics company that acts as a middleman rather than owning the underlying transportation assets. Let’s breakdown their business:

  • Air Freight: EXPD acts as an agent, working with airlines to arrange the transportation of cargo. They handle everything, from booking cargo space to managing the paperwork and customs requirements. This is their largest segment, making up around 40% of their revenue in the last quarter.
  • Ocean Freight: Similar to air freight, EXPD works with shipping lines to facilitate ocean cargo transportation. They handle booking cargo space, documentation, and other logistical needs. This segment makes up roughly 30% of the revenue.
  • Other Services: EXPD also offers other services including logistics, warehousing, insurance, and customs brokerage services. They also perform trade management services, such as cargo insurance and handling of claims. This segment provides approximately 30% of revenues.

The company’s strategy revolves around providing supply chain solutions to customers and offering customized services.

The logistics industry is highly cyclical and fragmented. These are a few trends impacting the business:

  • Global Trade: EXPD’s business is highly correlated to the level of global trade. Any slowdown in global trade due to economic slowdown or geopolitical instability would impact their revenue.
  • Supply Chain Disruptions: Recent supply chain disruptions have emphasized the importance of robust and adaptable logistics solutions. This can work as an opportunity for EXPD to showcase its expertise and also expose their operational risks.
  • Technology Adoption: Technology adoption is increasing in the industry. From automation to data analytics, companies are trying to create efficiencies in operations, visibility, and connectivity.
  • E-commerce: E-commerce has increased the demand for logistics, particularly from the end consumer. This creates both opportunities and challenges, as companies must adapt to fast shipping times and low costs.

Competitive Landscape

The logistics industry is highly fragmented and extremely competitive, here’s a short overview of the landscape:

  • Non-asset-based players such as Expeditors focus primarily on acting as a middleman. They have to build a solid customer base and great operational expertise in order to be successful, and are usually preferred by customers who value specific services for their operational problems.
  • Asset-based companies such as large freight carriers (i.e., UPS or FedEx), have more control over operations but can have inflexible logistics solutions.
  • Technology companies are entering the market and offering new tools that provide customers more control.
  • International freight forwarders are constantly looking to get into the markets EXPD works in and this provides additional headwinds.

What Makes EXPD Different

While several companies operate in the global freight forwarding market, Expeditors have a few distinguishing features:

  • Non-Asset Based Model: This allows for more flexible solutions and can help them to adapt to changes in market conditions, without being tied down to their own tangible assets.
  • Customized Solutions: EXPD focuses on creating customized solutions for clients. They often become intimately aware of the inner workings of their customers, which allows them to offer them better and more suitable solutions.
  • A focus on Relationships: Many reviews from people that have worked with EXPD mention the long lasting relationships that they have with their clients.
  • Large and Diverse Global Network: Their global presence gives them a solid competitive advantage.
  • “Culture”: The company prides itself on a people focused culture and this helps with retaining talent and improving operational expertise.

Moat Analysis: 3 / 5

While EXPD is a solid player in its sector, its moat is not that strong, but it exists.

  • Switching Costs: EXPD has been able to achieve some switching costs with their customers. The more their service integrates with customers, the more complicated it is to change to another provider. This is reinforced by the fact that many of their customers, who are mostly large businesses, have used them for many years. However, these switching costs aren’t large and, as mentioned above, other companies in the industry are working hard to acquire and win these types of customers away.
  • Network Effects: The network effect is very powerful, as it means that a product’s value increases as more and more people use the network. EXPD does benefit from the network effect, though it isn’t strong enough for this to act as a moat. This effect occurs on a smaller scale within their own networks, as shippers tend to use networks with which they are familiar, and they will likely want to connect with other companies that already use that service provider.
  • Scale Advantage: EXPD has one of the largest global networks for a non-asset based company. While scale provides cost advantages, it does not act as a significant barrier to entry. Other competitors can scale up and offer similar services.
  • Intangible Assets: EXPD does not have a brand that generates strong price premiums, their brand is only a signal to customers that they know the logistics space. They don’t use technology or production processes that are proprietary or patent-protected. Thus, no strong intangible moat.
  • Overall: Expeditor has a narrow-moat, and its position is likely to be somewhat stable, with small improvements in their business over time. However, the company’s moat is not that strong, because there are many competitors and few real barriers to entry to their business model.

Conclusion: The moat is narrow.

Risks to the Moat

There are several factors that could erode the company’s competitive advantages:

  • Technological Disruption: Technology can rapidly change the industry, creating new ways to conduct business or new services that could make EXPD’s current offerings obsolete. AI-driven logistics platforms, for instance, might circumvent the middleman.
  • Intense Competition: Several competitors are trying to win market share, so competitors could potentially provide services at similar or lower price points. Some competitors with significant resources could cause disruption.
  • Economic Downturns: EXPD’s business is heavily correlated to the health of the economy. A large slowdown will lead to reduced revenues and profits.
  • Global Instability: Conflicts and trade barriers can also limit business opportunities and impact EXPD’s bottom line.
  • Inability to Manage the Business: Although management is not their source of moat, it could severely affect the company’s operations if management fails to do what is necessary to stay competitive.

Business Resilience

Despite some potential long term issues with its moat, EXPD can be seen as a business that is rather resilient:

  • Adaptable business model: A non-asset based business model allows more flexibility than companies tied into their own equipment or infrastructure.
  • Client Loyalty: They build relationships with their customers that are long and durable. It also means a consistent cash flow, and they can rely on repeat business.
  • Geographic and Industry Diversification: Their broad service base and wide geographic scope allows them to reduce the risks associated with a particular industry or region of the world.
  • Financial Discipline: The company manages its cash well and can withstand large changes in market conditions and customer demands.

Financials

The financials of EXPD are fairly straightforward and easy to analyze. There are a few things worth mentioning here:

  • Revenue Growth: EXPD’s revenues has generally been growing, with revenue reaching new heights over the past few years as they recovered from the COVID slump, and benefited greatly from high shipping costs due to supply chain issues. In the latest quarter, their volumes are down but profits are up due to increased margins.
  • Margins: Their profit margins are generally quite robust. This is mostly because the company doesn’t own assets, allowing them to have more flexibility on the cost side. The management is actively increasing prices, which can further increase profit margins, as their costs tend to be relatively stable. Their operating profit for the last quarter was 16.9% but the previous year it was 20.8%.
  • Cash Flow: Cash flow is generally good at EXPD, due to their strong margins and stable base business.
  • Debt: The company has little or no debt, which is why their balance sheet health is highly rated.

Their focus is on increasing their bottom line. They are focused on achieving profitability at a higher scale. Their most recent quarter shows a continuation of that trend: increased profitability and increased margins, while their volumes decreased.

Understandability Rating: 2 / 5

The business model of EXPD is fairly simple to understand: it acts as a middleman connecting shippers with carriers and offers logistical services. However, once one tries to understand the business on a more operational and deeper level, it becomes more difficult. They provide a large range of services and are heavily affected by global trade dynamics, which are hard to understand and forecast. Finally, it isn’t clear how they compete against the competition, except that they might be better at relationships and provide custom solutions. This is why the understandability rating is at 2.

Balance Sheet Health: 5 / 5

The balance sheet of EXPD is incredibly strong, so it has a perfect score of 5 / 5 for its health. They have very little debt and strong liquidity with over $2 billion in cash in their latest report. Their strong balance sheet can help them to weather a downturn.

Additional Points

  • Management Perspective: On the latest call, management mentioned that air cargo volumes were down, but that they are still focused on delivering value for investors.
  • Concerns with volumes: While profit margins have been increasing, their volumes have decreased considerably. However, management states this is a result of the pandemic boom and that volumes will eventually return to their historical levels.
  • Capital Allocation: The management is currently focusing on share repurchases and have been doing that for quite a while now. They have spent over $2 billion in share repurchases over the last three years.
  • Acquisitions: While not very common for this company, they have indicated that they would consider acquisitions that make strategic sense.