A COVID-19 Boost for This Global Trade Middleman

In a pandemic economy, shipping is key...

E-commerce demand has surged because of COVID-19. With folks stuck at home, they've turned to online shopping to get the things they need. This has boosted shares of companies like Amazon (AMZN).

But it also benefits the companies making sure the goods get from point A to point B. And that's good news for today's company...

Expeditors International of Washington (Nasdaq: EXPD) is a global logistics company. It helps move goods all over the world and deals with all the challenges of international shipments. Its customers include global businesses engaged in retailing and wholesaling, electronics, and manufacturing.

Expeditors deals with the big boys of global trade. And it's not reliant on a small number of customers. In fact, no single customer accounts for 5% or more of sales.

The company is headquartered in Seattle, Washington and has regional headquarters in London, Dubai, Shanghai, and Singapore. It operates more than 300 facilities in more than 100 countries.

It's one of the few firms that has a true global network and offers a full complement of logistics services.

One great thing about Expeditors is it doesn't own any of the planes or ships that move the cargo. Planes and ships are expensive to purchase and cost a small fortune to maintain. Instead, Expeditors purchases air and ocean cargo space on a volume basis and resells that space to its customers at lower rates than they could get directly from the carriers.

This is a fantastic business if done correctly...

It's very "asset-light." That allows management to focus on profitability. The only things Expeditors owns are a handful of offices and warehouses throughout the world. Expeditors leases the vast majority of its facilities, which are located close to airports, ocean ports, and important border crossings. And maintaining leased properties doesn't require much capital.

It's also important to note, the logistics market is highly fragmented. The top 20 service providers account for just 30% to 40% of the global freight-forwarding market.

That sounds like a lot of competition, but it can work to Expeditors' advantage. First, a fragmented industry gives more room for Expeditors to grow and capture market share.

The second advantage Expeditors has is its global network. While it doesn't take much cash to rent out cargo space on a plane, it does take years to build the kind of network and develop the necessary relationships that Expeditors has.

The third is its technology platform, which was developed internally and through small value-add acquisitions. Smaller players work on patchwork systems. Expeditors uses the same platform across its entire global network, making it easier to track and coordinate shipments. That means fewer mistakes and faster answers for customers searching for shipments.

The fourth advantage is Expeditors' profitable "side business" – customs brokerage and other services...

Expeditors breaks its business up into three segments. Airfreight services accounted for 36% of revenues last year. Ocean freight and ocean services made up 27%, and customs brokerage and other services accounted for 37%.

And Expeditors' custom brokerage and other services make it an attractive stock compared with competitors...

If you've ever traveled internationally, I'm sure you've been frustrated by the customs process. It's much worse for companies moving big shipments.

As a customs broker, Expeditors helps importers clear shipments through customs by preparing necessary documents. It also calculates and arranges payment of duties and other taxes on behalf of the importer.

Expeditors not only provides these services for its own shipping customers, but also for companies that have not hired the company as a forwarder. That's great. Even if airfreight is down a certain quarter, customs brokerage might be up. It's not dependent on the other two segments. And customs brokerage is highly profitable.

Expeditors is a steady cash-flow producer. Free cash flow ("FCF") comes in at around $500 million a year... That's more than enough for Expeditors to pay off its $391 million in debt. And it's more than enough to cover the company's $1 per share annual dividend, which has increased every year since the 2008 financial crisis.

And the company has gotten a boost from the pandemic. With shipping more crucial now than ever before, Expeditors International is thriving... In its most recent quarter, sales jumped 27%, driven by a surge in demand for shipping of technology-related equipment, medical supplies, and other priority goods.

Expeditors takes an asset-light approach to logistics. This allows it to have thick margins and produce loads of FCF. And its business is seeing an increase in demand from the pandemic. As long as businesses and people need to ship their goods, these tailwinds should continue.