Expeditors Earnings: Air and Ocean Freight Activity Continues To Correct

Expeditors International’s EXPD gross revenue plummeted 44% year over year in the first quarter, short of our expected run rate, though we still think conditions will begin stabilizing in the back half. Recall revenue flipped negative in the fourth quarter following a few years of exceptionally strong volume and pricing growth. We don’t expect to materially alter our DCF-derived $104 fair value estimate. The shares are trading in fairly valued territory relative to our longer-term revenue, margin, and free cash flow growth forecasts.

Overall, 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 (loosening air and ocean capacity). We note, however, that revenue remains 36% above prepandemic first-quarter 2020 levels.

Air and ocean activity fell 6% and 26%, respectively, though comparisons are clouded by disruption from the previously disclosed first-quarter 2022 cyberattack, which materially disrupted Expeditors’ ability to process volumes. We suspect sell rates (to shippers) fell more than 37% for both modes.

Net operating margin (EBIT/net revenue) deteriorated to 31.6%, from an exceptional 40.2% a year ago, on lost leverage from lower net revenue. That said, Expeditors’ operating margin was mostly in line with the run rate we’ve been expecting for full-year 2023—we’ve already been baking in material normalization. Margin is still well ahead of the 25.9% posted in first-quarter 2020.