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Expeditors Navigates Rapid Fourth-Quarter Air and Ocean Freight Pullback

Conditions declined faster than we expected.

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Expeditors International’s EXPD gross revenue trend flipped negative, plummeting 36% year over year in the fourth quarter, well short of our expected run rate. This follows a 37% increase on average in the first half and staggering 72% jump in 2021. We’ve been expecting a material slowdown especially heading into 2023, but conditions deteriorated faster than we anticipated in the quarter. In short, air and ocean freight demand and pricing are retrenching off historic pandemic-driven highs seen throughout 2021 and into early 2022, especially given the pullback in retail sector inventory restocking and dissipating transportation supply chain constraints.

Air and ocean activity fell 20% and 15%, respectively, and we suspect sell rates (to shippers) fell more than 20% for both modes. On the positive side, buy rates paid to air and ocean carriers for capacity likely fell more than pricing to shippers, pushing the firm’s total gross margin percentage up 410 basis points to 29.5%. As a result, total net revenue (down 26%) fell less than gross revenue.

Net operating margin (EBIT/net revenue) deteriorated to 32.5%, from an exceptional 45.5% a year ago, on lost leverage from lower net revenue, along with higher incentive compensation (discretionary field and branch bonuses). Operating margin came in well below our forecast for the quarter, though it wasn’t drastically far below the run rate we’ve been expecting for full-year 2023—we’ve already been baking in material normalization for this year.

We will be tempering our medium-term top-line and margin forecasts, and macroeconomic uncertainty remains elevated, but we expect to reduce our DCF-derived $106 fair value estimate only modestly (by less than 5%) as our midcycle model assumptions remain mostly intact. The shares are trading in what we see as fairly valued territory.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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