(Editor’s note: comments from Cowen & Co. have been added since the original publication).
Expeditors International managed to squeeze out a solid gain in profits compared to the third quarter of last year on an expense and revenue performance that largely matched that of a year ago.
Equity markets recognized the achievement Tuesday. The company’s unadjusted EPS of $2.54 was ahead of consensus by 55 cents, according to Seeking Alpha. And the revenue figure for Expeditors was ahead of consensus by $150 million. At approximately 10:40 a.m., Expeditors (NASDAQ: EXPD) was up 7.77%, to $103.17.
Operating income rose 8% to $526.9 million, an increase of $37.3 million. Expeditors revenues rose a mere 1%, to $4.36 billion. But in dollar terms, the increase in revenues was $42.9 million.
That $42.9 million ended up as an increase in operating income of $37.3 million because while the cost of transportation was essentially flat percentage wise, it was up $8.8 million. Throw in a small drop in the cost of salaries and other expenses and the end result is a company that took in a small amount of additional revenue and turned most of it into operating profit.
The decline in the line item of “salaries and other expenses” of about $3.2 million occurred even as the company’s headcount rose to 20,269 from 19,034.
But looking forward, the comments by Expeditors officials in their earnings statement were mostly bearish. Expeditors does not hold a conference call with analysts.
“Based on what we currently see, these changing conditions that involve decelerating demand and an overall decline in rates are likely to continue for the remainder of 2022 and into 2023,” CEO Jeffrey Musser said in the statement.
The decline comes with a silver lining: an easing of congestion and other capacity constraints. Musser said Expeditors is “seeing air capacity return to higher levels, with Hong Kong and other origins in Asia reopening. In addition, the largely land- and port-based constraints that had so severely impacted the ocean market have significantly improved to where carriers are once again starting to manage capacity in certain trade lanes in an effort to address declining demand while sustaining falling rates.”
Declines in tonnage were stark for Expeditors. The company said its month-by-month decline in airfreight, measured in kilos, was 11%, 14% and 15%, respectively, for July, August and September. That resulted in a quarterly decline of 13%.
For ocean freight, it was drops of 9%, 11% and 10%, for a quarterly average of 10%.
And it is expected to continue, according to Musser. “Based on what we currently see, these changing conditions that involve decelerating demand and an overall decline in rates are likely to continue for the remainder of 2022 and into 2023,” he said in the statement.
Bradley Powell, the company’s senior vice president and CFO, also added an outlook for weak markets going forward. “We now believe we are seeing a shift towards slowing volumes and falling rates,” he said. “We are ready to further align ourselves with a post-COVID environment of higher inflation and tapered demand.”
Expeditors is not a company widely followed by transportation buy-side analysts. But Jason Seidl at Cowen & Co., in a summary of the earnings, sees further cost-cutting at Expeditors as likely, supporting bottom line profitability.
“While 2023 will likely be a year with both volumes and price declining, we wold expect EXPD to lean into cutting costs in ordeer to minimize its earnings declines,” Seidl wrote in a report. “With both ocean and air declining double digits in Q3, a muted peak season, and weak October import data, (revenue) should continue to decelerate in Q4 and we model 22% revenue decline in 2023.”
Expeditors is the only logistics company considered a “dividend aristocrat.” That definition describes companies that have inceased their dividend 25 consecutive years. Expeditors increased its dividend in May to keep its streak alive.
Expeditors stock is down about 16.75% in the last year. Even with that decline and the higher dividend payout, the company’s yield is a modest 1.28%, according to Barchart.