Expeditors Earnings: The Air and Ocean Unwind Persists, but Outlook Is Stable

In the third quarter, Expeditors International’s EXPD gross revenue fell 50% year over year, similar to the second-quarter decline. Revenue came in shy of our forecast, albeit not drastically. It’s been tough to spot a trough amid the industry’s heavy normalization phase. Recall revenue flipped negative in fourth-quarter 2022 following a few years of meteoric growth in both volume and pricing (sell rates) to shippers.

Freight demand and pricing continue to retrench off historic pandemic-driven highs, due in large part to muted retail sector inventory restocking and the swing to excess carrier capacity. Expeditor’s air and ocean activity fell 14% and 15%, respectively, while sell rates to shippers continued to plummet to an even greater degree for both modes. On the positive side, management noted that rates are increasing in certain lanes and that “tonnage and volumes are perhaps flattening or improving.” In fact, volumes increased sequentially from the second quarter.

Net operating margin (EBIT/net revenue) deteriorated to 27.4%, from an unusually robust 45.1% a year ago (which was the peak) on lost leverage from falling net revenue. Also impacting profitability is freight mix. That is, shipment sizes have been declining (drives up processing costs) while cargo has been shifting to ocean from higher-margin airfreight.

We don’t expect to materially alter our DCF-derived $106 fair value estimate since we’ve already been baking in a material pullback this year. The shares have eased over the past few months and are now appropriately valued (previously overvalued) relative to our longer-term free cash flow growth forecasts.