Expeditors International of Washington (EXPD)

Expeditors International of Washington (EXPD) is trading nearly 6% lower after the third-party logistics firm said second quarter earnings would be 24 cents to 26 cents a share, less than the average estimate of 30 cents a share.

Like most companies related to freight transportation, Expeditors’ performance has been hurt by a steep drop in production across a range of sectors. Encouragingly, the firm noted that volumes improved in late June, but it will be important to see if the company maintained its industry leading profitability. During the first quarter of 2009, Expeditors managed to produce $164 million of free cash flow – a whopping 18% of revenues – despite challenging conditions.

Expeditors’ low-cost business model is behind the firm’s ability to generate strong returns on invested capital (ROIC) of over 30% during the last five years. Expeditors also benefits from a network effect, in which each node in the network becomes more valuable when the firm adds more nodes. As the system grows, shippers gain the ability to ship efficiently to even greater locations.

This network effect along with other competitive advantages like economies of scale and pricing power have historically awarded Expeditor’s a premium. During the past decade, Expeditors traded at rich P/E multiples ranging from 32 to 40. Today, Expeditors’ forward P/E is about 23.

This may not be an absolute bottom, but the low multiples suggest this could represent an opportunity for patient investors.

Click here to read more about Expeditors’ core business and strengths from my March 18 post.
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Peter J. Lazaroff