Strong headwinds in air, ocean markets lead to big drops at Expeditors

Expeditors International had a first quarter that one might have expected in air and ocean freight markets that have been dropping hard.

The Seattle-headquartered global logistics company did manage to post in the first quarter a revenue decline of 44%, which sounds like a lot but is not as much as the 51% decline in its cost to secure capacity. It also kept its salaries and expenses in check, seeing those decline 13%.

The end result was that operating income for the company dropped 40%, which is 400 basis points less than the decline in revenue.

Quarterly data at Expeditors (NASDAQ: EXPD) released Tuesday appeared to show the airfreight market getting healthier over the three months while the ocean freight market softened. However, as CFO Bradley Powell noted in his prepared remarks released with the earnings, comparisons to last year need to take into account the February 2022 cyberattack that affected operations at Expeditors. 

Expeditors does not disclose the actual number of kilos it moves in airfreight, but its year-over-year (y/y) airfreight decline was 27% in January and 10% in February, followed by a 33% upturn in March for an overall decline of 6%. (Given that the tonnage is not disclosed, it cannot be said with assurance that the amount of freight moved was higher in March than in January, only that the y/y figure improved.)

It was the opposite story for ocean freight. It suffered a 23% decline y/y in January, 25% in February and 29% in March.

Powell said the reduction in costs could be attributed to lower commissions and bonuses “as a result of lower revenues and operating income.” He added that the pay structure at Expeditors “rewards our people when financial results are strong and naturally incentivizes them to make adjustments based on volumes and improved efficiency when financial results are less robust.”

While layoffs have been on the agenda for numerous logistics companies in recent months, Expeditors President and CEO Jeffrey Musser in his prepared remarks said the company is trying to find a way to keep costs down without taking that route. 

“We are adapting and working diligently to bring expenses in line with lower revenue by lowering headcount and payroll expenses without resorting to layoffs,” he said.

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North American head count at Expeditors at the end of the first quarter was 7,455, It was 7,778 at the end of 2022 and was slightly less than that a year ago at 7,718. One area of head count growth was information systems, which was up to 1,220 in the first quarter from 1,042 a year ago, when the cyberattack hit.

Expeditors does not hold an earnings call with analysts.

In a report on the earnings, the transportation research team at TD Cowen led by Jason Seidl said Expeditors’ earnings per share of $1.45 was above the Cowen estimate of $1.35 and a consensus forecast of $1.33.

Despite topping consensus in its EPS, Expeditors stock fell Tuesday by $3.23 to $113.24, a decline of 2.77%. Over the last 52 weeks, according to data from Barchart, the stock is up 13.23%, which coincidentally is an increase of $13.23, because a year ago the stock was sitting at $100.

But the last few months have been volatile. Expeditors stock is up 2.83% in the last month but down 4.74% in the last three months.  

Cowen remains bullish on Expeditors stock despite its current market, which was described by company management as the word of the quarter: soft. Virtually every logistics-related company in its earnings has described the market with that word.

“EXPD should be a long-term core holding for those looking for a 25% return on invested capital [and] 100%+ of net income returned to investors,” Cowen wrote, also praising a compound annual growth rate of 13% and “strong free cash flow generation.” 

“However, over the near to intermediate terms there are headwinds such as slowing global trade, near-sourcing and importantly, a potential rebalancing of supply and demand in the ocean and air freight markets,” Cowen wrote.

On the same day it released its earnings, Expeditors in essence renewed its membership in an exclusive club: the dividend aristocrats. 

Dividend aristocrats are companies that have paid an increased dividend each year for at least 25 years. Before C.H. Robinson (NASDAQ: CHRW) joined the club earlier this year, Expeditors was the only logistics-focused dividend aristocrat. 

The company announced an increase of 2 cents per share in its dividend to 69 cents per share.

More articles by John Kingston

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