Miami University 2016 Harvard Financial Analyst Symposium Competition Finalist

Harvard Financial Analyst Symposium — November 7, 2015

Expeditors International of Washington, Inc.Matt Bender | Michael Loffredo | Jed Sekaran | Alex Vielmetti

Investment Thesis

Company Overview

Industry Dynamics

Performance Headwinds

Valuation Analysis

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10

15

19Final Thoughts

Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

Valuation Summary

Investment Thesis

EPS Projections

Inflated Consensus Estimates

Decreasing Global Trade

Volume

Margin Compression

Management Exodus

v Weak global trade stemming from currency volatility, depressed commodity prices, and slowing growth in emerging markets

v Problems in the Pacific – an area of increased infrastructure spending by Expeditors

v Overall glut in freight capacityv Loss of pricing leverage due to overcapacityv Trend towards bypassing brokers to conduct business

directly with asset-based shippers

v Departures of several key executives including the President and COO, GM of Beijing office, President of Americas, as well as CIO

v Loss of key relationships and experience as Expeditors enters a tumultuous time

v Unsustainable margins in Q1 and Q2 as a result of disrupted shipping lanes along the West coast of the US

v Expectations high after strong Q2 results that were simply showing residual effects of Q1 port strikes

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Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Historical Projected Consensus

$30.00 $40.00 $50.00 $60.00

Comparables P/E

Comparables EV/EBITDA

DCF Exit Multiple

DCF Perpetuity Growth

52 Week Trading Range

3Sources: Bloomberg, Industry Reports, Company Fillings

Company Overview

4

Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

FY 2014 Revenue BreakdownBusiness Overview

Company Overview

Stock PerformanceKey Statistics

v Expeditors International of Washington, Inc. (“Expeditors”) operates in the non-asset freight forwarding industry

v Expeditors operates 186 full service offices worldwide

Ø Employees over 14,500 people

v Headquartered in Seattle, Washington

v NASDAQ: EXPD

Market Data ValueCurrent Price $49.75 EV/EBITDA 12.2x Market Cap. 9,772 M EV/Sales 1.3x Annualized Dividend $0.68 Price/Book 5.2x Dividend Yield 1.3% Price/Earnings 23.5x

Operations Capital StructureGross Margin 13.9% Debt 0.0 EBITDA Margin 10.5% Cash & Cash Equiv. 1,032.8 Operating Margin 97.7% Minority Interest 3.1 Profit Margin 6.3% Current Ratio 2.5x

43%

34%

23%

Customs Brokerage & Other Services

Airfreight Services

Ocean Freight & Services

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10

$30

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$55

10/26/2014 2/26/2015 6/26/2015 10/26/2015

Volu

me

(MM

)

Stoc

k Pr

ice


Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

Positioning Analysis

WTO

S

v Strong value-add services provided by the customs brokerage division

v High profit margin relative to competitors

v Low asset-base

v Net cash position does not make for an optimal capital structure

v Reshuffled management team

v Industry moving towards cutting out freight brokers

v Further disruptions to international shipping

v Possible acquisition opportunities as smaller players go into distress

v Continued growth from key customers in healthcare and technology

v High exposure to faltering emerging markets

v Lagging recovery of global trade volumes

v Continuing growth in freight capacity


Industry Dynamics

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Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

Industry Consolidation Ultra-Fragmented Industry

Industry Overview

Supply Chain Overview

v Top 4 companies account for just less than 10% of industry revenue

v ≈55% of all companies employ 1-4 people

v Factors for success:Ø Key relationships with shippers and customersØ Ability to quickly integrate new technologyØ Superior customer/client service

v Larger players have significant advantageØ Ability to purchase shipping volume in bulk

v Expansion into more value-add servicesØ Logistics and supply-chain management

v Pressure to become full-service solutionØ “Door-to-door” service (trucking, air, ocean)

•Large shipping volumes without infrastructure to sell directly to customers

Asset-Based Freighters

•Buys bulk shipping volume to distribute volume to end customers with value-add services

Freight Forwarders • Inability to purchase

shipping at bulk pricing•Rising demands like

“just-in-time” and increasing “kitting”

Customers


Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

SCFI: Asia to East CoastSCFI: Asia to US West Coast

Broader Industry Trends & Macro Drivers

On-Shoring HeadwindShipping Supply & Demandv Significant government incentives for domestic job

growth

v Companies can reduce logistical costs from long supply-chains

v Allows for increased just-in-time strategies

v Decreases overall demand for freight

v Asset-based shippers can decommission volume to create false shortage

v Global shipping demand down due to decreased commodity trade, currency devaluation, and emerging market weakness

v Retailers are keeping inventories leaner going into holiday season compared to last year

v September consumer spending missed consensus estimates and a sharp deceleration from August

Ø Slowest growth since January

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(40%)

(20%)

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Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

Historical SurpriseUnsustainable Start

Inflated Expectations

Major Areas AffectedWest Coast Port Gridlock

v Expeditors experienced stronger than expected quarters as a result of one-time margin improvements

v Capacity held by brokers became highly sought after when shippers struggled to find capacity during the port shutdowns

v A strike by the International Longshore and Warehouse Union slowed traffic through the ports for months

v Switching routes to go through the eastern seaboard increased revenues for shippers benefitting from longer trips

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2015Q1 2015Q2

Estimated Actual


Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

Growth in World Trade VolumesSignificant Headwinds

Global Trade

Asian Trade RevisionsMisplaced Bets

v Trade growth has been equal to GDP growth rather than historical 2.0x

v Key FactorsØ Low commodity prices

Ø Interest rate uncertainty

Ø Currency exchange fluctuations

v Expeditors has recently expanded their infrastructure in Southeast Asia

v Downward revisions primarily driven by decelerating growth in China

v Results in unnecessary capacity growth that depresses margins

5.4%

2.2% 2.4% 2.8% 3.3%3.9%

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6.0%

2011 2012 2013 2014 2015 2016E

20 year average

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2.0%

4.0%

6.0%

Export Growth Import Growth

Original Revised

(1.9%) (2.5%)


Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

Lean Holiday InventoriesNormalizing Shipping Conditions

Margin Compression

Margins by Revenue SegmentNet Revenue Margin

v Compared to the first half of 2015, available freight capacity has increased substantially

Ø Limited capacity is commonly attributable to uncharacteristic weather

Ø Shippers no longer need to secure capacity in the spot market

v Shippers are looking to negotiate directly with asset owners to avoid the volatility of the spot market

v For the rest of 2015, demand for airfreight and ocean freight forwarding appears comparatively weak

Ø Lack of significant product launches along with excess capacity

v Many shippers would rather run out of inventory than hold excess amounts during the holidays

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2014 2015E 2016E 2017E 2018E

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Airfreight services Ocean freight and ocean services

Customs brokerage and other services


Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

Current Key ExecutivesDeparture of Top Personnel

Management Difficulties

Compensation StructureSuccession Planning

v Several experienced, upper-level managers retired during the past year

v While the Company may have strong internal candidates, there is no substitute for relationship building

Ø Importance of relationships has only increased with continued security regulation and concerns over terrorism

v This significant level of retirement may prove costly as the Company navigates an increasingly challenging environment

v New management is composed of primarily internal hires

Ø Company may fail to branch out and explore new trends, such as focusing on growth through acquisitions

v The Company utilizes a severe system of compensation that is based almost purely on management performance

Ø If operating losses result, they must be made up before cash incentives can be paid out

v Very difficult to separate what managers can and cannot control, which may make it difficult to retain talent

Name PositionJeffrey Musser President, CEO, director

James Wang President of Asia Region, director

Jordan Gates COO, director

Rommel SaberPresident of Europe, Africa,

Middle East, and Indian Region

Bradley Powell Senior Vice President, CFO

Christopher McClincy Senior Vice President, CIO


Valuation Analysis

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Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

$30.00 $35.00 $40.00 $45.00 $50.00 $55.00 $60.00

Comparables P/E


DCF Exit Multiple



Valuation SummaryTarget Price: $40.00 Current Price: $49.75

2015E Earnings: $2.31 Forward P/E: 17.3x

2016E Earnings: $2.34 Forward P/E: 17.1x


Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

Consistent PremiumPeer Group

Multiples Analysis

Blended Forward MultiplesComparable Valuation

v Fragmented industry leads to few direct comparable companies

v Compete with logistic departments of multi-national corporations

Ø UPS, FedEx, DHL etc.

v Future comparable multiples take into account growth EXPD’s competitors will experience in the next 12 months

v Consensus has been raised for EXPD over the past 6-12 months

v Continues to receive a premium forward multiple

EXPD's Estimated NTM EPS $2.30 Comparable Multiple Range 17.4x 19.4x

Price Range $39.89 $44.48

EXPD's Estimated NTM EBITDA $742 Comparable Multiple Range 9.2x 11.2x

Price Range $41.59 $49.43 10x

14x

18x

22x

26x

30x

8/3/2015 8/23/2015 9/12/2015 10/2/2015 10/22/2015

EXPD CHRW ECHO


Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

Exit Multiple ValuationPerpetuity Growth Valuation

Discounted Cash Flow

Exit Multiple SensitivityPerpetuity Growth Sensitivity

PPG Method at 2.75%Terminal Value 7,604,579 Present ValuePV Sum of Free Cash Flows 1,705,983 PV of Terminal Value 4,936,991 Implied Enterprise Value 6,642,974

Net Debt (985,727)Equity Value 7,628,701

Shares Outstanding 191,918 Implied Price per Share $39.75

WACC

Perp

etui

ty G

row

th $40.56 8.0% 8.5% 9.0% 9.5% 10.0% 2.3% $43.39 $40.34 $37.74 $35.49 $33.53 2.5% $44.79 $41.49 $38.70 $36.31 $34.24 2.8% $46.31 $42.75 $39.75 $37.20 $34.99 3.0% $47.99 $44.11 $40.88 $38.15 $35.80 3.3% $49.84 $45.61 $42.11 $39.17 $36.67

WACC

Exit

Mul

tipl

e

$44.61 8.0% 8.5% 9.0% 9.5% 10.0% 9.5x $40.72 $40.00 $39.29 $38.60 $37.93 10.5x $43.51 $42.72 $41.95 $41.20 $40.47 11.5x $46.29 $45.44 $44.61 $43.80 $43.01 12.5x $49.08 $48.16 $47.27 $46.40 $45.56 13.5x $51.86 $50.88 $49.93 $49.00 $48.10

Exit Multiple of 11.5xTerminal Value 9,041,413 Present ValuePV of Free Cash Flows 1,705,983 PV of Terminal Value 5,869,802 Implied Enterprise Value 7,575,785

Net Debt (985,727)Equity Value 8,561,512

Shares Outstanding 191,918 Implied Price per Share $44.61


Final Thoughts

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Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

Valuation SummaryThesis

Final Thoughts

EPS ProjectionsRecommendation

v Inflated consensus estimates

v Decreasing global trade volume

v Margin compression

v Management exodus

We see Expeditors facing substantial hurdles in the next 12-months leading to a SELLrecommendation with a price target of $40.00

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Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Historical Projected Consensus

$30.00 $40.00 $50.00 $60.00

Comparables P/E


DCF Exit Multiple




Appendix

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Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

Income Statement

Expeditors International of Washington, Inc.In thousands, expect share data

Consolidated Statements of EarningsYears ended December 31, 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019ERevenues:Airfreight services 2,821,828 2,893,474 2,600,916 2,633,860 2,780,840 2,904,830 3,018,546 3,109,102 3,186,829 3,250,566 Ocean freight and ocean services 1,955,400 1,878,595 1,974,891 1,958,231 2,174,394 2,354,807 2,485,087 2,584,491 2,687,871 2,795,385 Customs brokerage and other services 1,190,345 1,378,429 1,416,408 1,488,196 1,609,487 1,685,491 1,750,949 1,803,477 1,875,616 1,950,641

Total revenues 5,967,573 6,150,498 5,992,215 6,080,287 6,564,721 6,945,128 7,254,582 7,497,070 7,750,317 7,996,593 Operating Expenses:Airfright services 2,181,598 2,193,122 1,983,696 1,994,374 2,103,777 2,144,088 2,235,350 2,310,063 2,371,001 2,424,922 Ocean freight and ocean services 1,569,877 1,443,170 1,542,170 1,521,340 1,712,795 1,808,610 1,916,777 1,995,227 2,077,724 2,163,628 Customs brokerage and other services 523,312 617,729 630,979 681,690 766,722 794,212 822,712 847,634 887,167 926,555 Salaries and related costs 894,132 993,358 995,052 1,032,601 1,065,329 1,161,228 1,222,266 1,259,508 1,309,803 1,359,421 Rent and occupancy costs 77,209 84,665 98,580 98,437 102,810 104,000 105,053 112,456 116,255 119,949 Depreciation and amortization 36,900 36,776 39,940 48,071 49,292 47,098 48,635 49,011 49,661 48,679 Selling and promotion 32,055 38,974 34,184 33,243 38,125 41,232 43,527 44,982 46,502 47,980 Other 105,260 124,377 136,816 118,428 131,223 146,098 152,346 157,438 162,757 167,928

Operating income 547,230 618,327 530,798 552,103 594,648 698,562 707,915 720,750 729,447 737,531 Other Income (Expense):Interest income 7,002 10,235 12,763 11,810 10,773 10,680 10,680 10,680 10,680 10,680 Other, net 9,836 9,466 6,832 8,713 5,468 6,397 6,397 6,397 6,397 6,397

Earnings before income taxes 564,068 638,028 550,393 572,626 610,889 715,639 724,992 737,827 746,524 754,608 Income tax expense 219,863 251,785 217,424 222,585 231,429 268,207 271,872 271,872 271,872 271,872

Net earnings 344,205 386,243 332,969 350,041 379,460 447,432 453,120 465,955 474,652 482,736 Less net earnings (losses) attribuable to noncontrolling interest 33 564 (391) 1,485 2,572 2,972 2,972 2,972 2,972 2,972

Net earnings attributable to shareholders 344,172 385,679 333,360 348,556 376,888 444,460 450,148 462,983 471,680 479,764

Basic earnings $1.62 $1.82 $1.58 $1.69 $1.92 $2.33 $2.36 $2.43 $2.47 $2.51 Diluted earnings $1.59 $1.79 $1.57 $1.68 $1.92 $2.31 $2.34 $2.41 $2.46 $2.50

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Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

Assumptions

AssumptionsAirfreight services growth 2.5% (10.1%) 1.3% 5.6% 4.5% 3.9% 3.0% 2.5% 2.0% Ocean freight and ocean services growth (3.9%) 5.1% (0.8%) 11.0% 8.3% 5.5% 4.0% 4.0% 4.0% Customs brokerage and other services growth 15.8% 2.8% 5.1% 8.2% 4.7% 3.9% 3.0% 4.0% 4.0% Total revenue growth 3.1% (2.6%) 1.5% 8.0% 5.8% 4.5% 3.3% 3.4% 3.2% Airfright services expense 77.3% 75.8% 76.3% 75.7% 75.7% 73.8% 74.1% 74.3% 74.4% 74.6% Ocean freight and ocean services expense 80.3% 76.8% 78.1% 77.7% 78.8% 76.8% 77.1% 77.2% 77.3% 77.4% Customs brokerage and other services expense 44.0% 44.8% 44.5% 45.8% 47.6% 47.1% 47.0% 47.0% 47.3% 47.5% Salaries and related costs 15.0% 16.2% 16.6% 17.0% 16.2% 16.7% 16.8% 16.8% 16.9% 17.0% Rent and occupancy costs 1.3% 1.4% 1.6% 1.6% 1.6% 1.5% 1.4% 1.5% 1.5% 1.5% Selling and promotion 0.5% 0.6% 0.6% 0.5% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% Other 1.8% 2.0% 2.3% 1.9% 2.0% 2.1% 2.1% 2.1% 2.1% 2.1%

Effective tax rate 39.0% 39.5% 39.5% 38.9% 37.9% 37.5% 37.5% 37.5% 37.5% 37.5%

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Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

Comparables

In millions except for per share data

Company NameTicker &

ExchangeShare Price Market Cap.

Enterprise Value

TTM Estimated NTM EBITDA

TTM EPSEstimated NTM EPS

Price Profit Margin

Enterprise Value

EBITDA Revenue TTM EPS NTM EPS TTM EBITDA NTM EBITDA

C.H. Robinson Worldwide, Inc. CHRW US $70.24 10,171 11,058 895 13,622 961 $3.40 $3.71 20.7x 18.9x 3.3% 12.4x 11.5x

Echo Global Logistics, Inc. ECHO US $24.38 754 907 45 1,405 87 $0.42 $1.31 58.0x 18.6x 1.4% 20.2x 10.4x

Kuehne & Nahel International AG KNIN VX CHF 138.30 16,827 16,313 1,087 17,709 1,093 CHF 5.87 CHF 6.02 23.6x 23.0x 3.6% 15.0x 14.9x

Sinotrans Limited 598 HK CNY 4.26 2,473 3,089 295 7,678 408 CNY 0.32 CNY 0.33 13.3x 12.9x 2.7% 10.5x 7.6x

XPO Logistics, Inc. XPO US $25.04 2,759 5,952 109 3,412 892 ($2.09) $0.39 -- -- (2.7%) -- 6.7x

Expeditors Intl. Washington, Inc. EXPD US $50.46 9,545 8,515 716 6,843 790 $2.20 $2.35 22.9x 21.4x 5.7% 11.9x 10.8x

1st Quartile 2,473 3,089 109 3,412 408 18.8x 17.2x 1.4% 11.9x 7.6x

Median 2,759 5,952 295 7,678 892 22.1x 18.8x 2.7% 13.7x 10.4x

Mean 6,597 7,464 486 8,765 688 28.9x 18.4x 1.7% 14.5x 10.2x

3rd Quartile 10,171 11,058 895 13,622 961 32.2x 19.9x 3.3% 16.3x 11.5x

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Investment Thesis

Company Overview

IndustryDynamics


Valuation Analysis

Final Thoughts

Discounted Cash Flow

TRADITIONAL PRO FORMA DCF

Historical Projected2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

EBITDA 584,130 655,103 570,738 600,174 643,940 745,659 756,550 769,761 779,108 786,210 Less D&A 36,900 36,776 39,940 48,071 49,292 47,098 48,635 49,011 49,661 48,679

EBIT 547,230 618,327 530,798 552,103 594,648 698,562 707,915 720,750 729,447 737,531 Tax Effect 205,211 231,873 199,049 207,039 222,993 261,961 265,468 270,281 273,543 276,574

NOPAT 342,019 386,454 331,749 345,064 371,655 436,601 442,447 450,469 455,905 460,957 Add: D&A 36,900 36,776 39,940 48,071 49,292 47,098 48,635 49,011 49,661 48,679 Less: CapEx (42,408) (78,115) (47,626) (53,411) (37,472) (49,177) (54,409) (56,228) (38,752) (39,983)Less: Change in NWC (2,470) (57,817) 49,740 (124,997) (17,512) (10,384) (6,082) (6,178) (5,302)

Free Cash Flow 342,645 266,246 389,464 258,478 417,009 426,289 437,170 460,635 464,350

PV of FCF 382,493 358,640 337,351 326,037 301,462

WACC CalculationTotal Debt 0 - -Total Equity 9,684,181 100.0%

9,684,181 100.0% Beta 0.95 Expected Market Return 9.4% Risk Free Rate 2.2%

Cost of Equity 9.0% WACC 9.0%

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Miami University 2016 Harvard Financial Analyst Symposium Competition Finalist

Business

Transcript of Miami University 2016 Harvard Financial Analyst Symposium Competition Finalist