Expeditors International of Washington (NASDAQ: EXPD) provides shipping services to manufacturing and retail customers. The company does not own transportation assets (i.e. ships, trucks, planes), and instead uses third parties to ship goods. While EXPD does not compete for overnight courier or small parcel business, the logistics company does provide ocean and air freight services, along with customs brokerage service. EXPD uses its size and volume to negotiate prices with third-party carriers and consolidate shipments for customers.
At the end of September of 2007, Expeditors International of Washington ran 174 full-service offices and had operations in over 30 countries. Shipping goods internationally creates potential government and global economic risks. Changing tariff or trade regulations (possibly resulting from terrorist acts) could impact EXPD's business. Also, with a large portion of revenues coming from retailers, a decline in consumer demand would likely hurt operating income.
Expeditors International of Washington specializes in transporting goods internationally. Manufacturers and retailers outsource their shipping to EXPD in order to focus on their core business, letting EXPD handle the complex logistics of moving goods between multiple international locations. Expeditors International of Washington will buy cargo space on planes and aircraft and then resell this space to its customers. EXPD's net revenue comes from the difference between the sell rate (what it bills its customers) and the buy rate (what it pays carrier to ship goods). In many instances, clients ship loads that don't fill containers, and EXPD consolidates their freight with other customers in order to increase shipping efficiencies and lower costs. EXPD also sells customs brokerage services. The firm can clear shipments, calculate tariffs, complete documentation, and arrange inspections by government agencies.
Here's an example of EXPD's operating model: The company could help several small Chinese manufacturers ship their goods to American retailers. These smaller companies don't have major purchasing power and may not be able to fill an entire cargo compartment. As a result, individually they'd have to pay a premium for shipping companies to transport their good. However, EXPD can fill a container by consolidating the shipments of multiple companies. EXPD buys the cargo space, consolidates the shipments, and turns a profit due to the discount it receives on the cargo space and the efficiency of its shipments. EXPD can then help the companies clear customs both in China and the USA, which can be complex because of changing government port and trade regulations. So EXPD charges the firms the same rate that it would cost to ship the goods themselves, but it ships them at lower cost, and the difference becomes the firm's profit.
Expeditor's revenue can be broken down into three main segments:
International shipping is complex, and customers may use only one of EXPD's services or may opt to use all. The following table shows each segment's contribution to total revenue and total operating income.
Revenue & Operating Income.
|Revenue (in $thousands)||2006||% Increase||2005||% Increase||2004|
|Ocean freight and ocean services||1,553,048||13.0%||1,374,197||16.6%||1,178,975|
|TOTAL OPERATING INCOME:||375,116||38.4%||271,053||28.2%||211,424|
Net revenue is a good gauge of EXPD's business strength. Net revenue indicates the difference in payment received from customers and expense paid to third-party carriers. This chart shows net revenue over the past three years for each business segment of Expeditors International of Washington.
Net Revenue over the Past 3 Years.
Each segment experienced an increase of 20% in net revenues in 2006 compared with 2005.
Expeditors International of Washington has a history of organic growth, growing its business by building internally rather than acquiring competitors. EXPD tries to retain and deepen talent by promoting from within the company and using performance-based pay structures for its employees. The company also allows great flexibility among its executive management in order to let each manager decide how best to increase operating profit. In 2007, EXPD hopes to expand its Asian operations by opening an additional 10 offices.
|'||2004 Exports||2005 Exports||2005/2004 %||2006 Exports||2006/2005 %||2007 Exports||2007/2006 %|
|Total, All Countries||819||904.3||10.4%||1,037.30||14.7%||1,163.30||12.1%|
|'||2004 Imports||2005 Imports||2005/2004 %||2006 Imports||2006/2005 %||2006 Imports||2007/2006 %|
|Total, All Countries||1,471||1,671.40||13.6%||1,855.40||11.0%||1,953.60||5.3%|
EXPD competes with approximately 15-20 main competitors. Of those main competitors, 3 are behemoth asset-based integrators, 7-10 are foreign-based non-asset based, and the remainders are mid-sized US non-asset based logistic companies like EXPD. Asset based logistic companies, which own transportation vehicles, include YRC Worldwide (YRCW) and Conway Inc (CNW). Non-asset logistics, like Expeditors International of Washington, do not own ships, planes, or trucks and include C.H. Robinson Worldwide (CHRW), UTi Worldwide (UTIW), and Pacer International (PACR). These firms compete for shipping orders and logistic management from customers primarily based on price, reliability, technological solutions, and breadth of services available. EXPD does not compete for small parcel and next-day courier service.
|Company||2006 Sales||Net Income||1-Yr Sales Growth||Growth Rate (5 Yr)||# of Countries With Business Operations||Facilities/Offices||Operating Margins||Return on Investment|
|United Parcel Service (UPS)||47,547 M||4,202 M||11.7%||12.1%||200||N/A||13.99%||12.11%|
|FedEx (FDX)||35,214 M||3,016 M||9.0%||14.7%||220||N/A||8.93%||15.22%|
|C.H. Robinson Worldwide (CHRW)||6,556.2 M||266.9 M||15.2%||16.2%||23||214||6.95%||18.06%|
|Expeditors International of Washington (EXPD)||4,626 M||235.1 M||18.6%||17.5%||50||320||8.27%||13.26%|
|UTi Worldwide (UTIW)||3,561 M||107.9 M||27.8%||17.5%||65*||640||3.79%||5.38%|
|Pacer International (PACR)||1,889 M||68.3 M||1.5%||10.5%||3||20||5.21%||11%|
|Hub Group (HUBG)||1,610 M||48.7 M||5.1%||19.9%||3||20||5.32%||11.12%|
|ABX Air (ABXA)||1,260 M||90.1 M||-13.9%||N/A||1||15||3.67%||4.29%|
Management believes its compensation structure for managers provides incentive for growth and retention of key employees. EXPD believes its focus on customer service, aggressive sales effort, and technological innovation positions the company to out-pace its competitors. EXPD sees customers needing great technological solutions over a worldwide network in the long term. EXPD believes its attention to these factors have contributed to its success.