Expeditors Profits Less on Low Rev

Expeditors International of Washington Inc.’s ( EXPD - Analyst Report ) quarterly performance lacked luster yet again. The company reported first quarter 2012 adjusted earnings of 36 cents per share that missed the Zacks Consensus Estimate by a penny and deteriorated 14% from 42 cents earned in the year-ago quarter. A lackluster revenue performance in air and ocean freight segments was primarily responsible for the underperformance.

Despite not being able to match up to the Zacks Consensus Estimate and the year-ago profit level, earnings came within the company’s projected first quarter estimates of 35–37 cents per share.

Net income attributable to shareholders declined 16% year over year to $76.7 million in the reported quarter.

Total revenue decreased 3% year over year to $1.4 billion, in the process missing the Zacks Consensus Estimate of $1.5 billion, owing to lower-than-expected peak seasonal demand throughout the quarter.

On a year-over-year basis, first quarter revenues from Other North America increased 12.7%. Revenues from the United States, Latin America, Asia Pacific, Europe and Africa, as well as Middle East and India declined 0.4%, 6.2%, 5.2%, 3.8% and 8.4%, respectively.

Quarterly gross profit (net revenues) dropped 2% year over year to $446.6 million, resulting in gross margin (yield) of 31.6%, up from 31.1% in the year-ago quarter.

Operating income declined 15% year over year to $125.3 million and operating expenses also lowered 2.1% year over year to $1.3 billion in the reported quarter.

Revenue Segments

Airfreight Services revenue fell 8.8% year over year to $638.9 million in the first quarter.

Ocean Freight and Ocean Services revenue dropped 1.3% year over year to $434.3 million.

Customs Brokerage and Other Services revenues climbed 5.7% year over year to $338.1 million.

Liquidity

Expeditors’ exited the first quarter with operating cash flows of $147.4 million compared with $177.8 million at the end of the year-ago quarter. Cash and cash equivalents as on March 31, 2012 was $1.4 billion, up from $1.3 billion in the same period a year ago.

Our Analysis

Despite continued decline, we believe Expeditors International is poised to benefit from recovery in its freight business, market share gains, productivity improvement and growing international trade. The company remains focused on increasing its customer base and plans to further enhance its business. The company is investing in new opportunities and services, including those in the aerospace, pharmaceutical/healthcare, aviation, and energy verticals. Thus, we believe Expeditors International is well positioned to grow its top line over the long term. Additionally, the ongoing operating efficiencies and Expeditors’ ability to pass on the higher rates to customers will aid profitability going forward.

However, we remain concerned about the uncertain macroeconomic environment that continues to affect the global demand trend, thereby hurting Expeditors’ performance. Further, intense competition from major rivals likes United Parcel Service Inc. ( UPS - Analyst Report ) and dependence on asset-based transportation providers may hinder its financials.

We are currently maintaining our long-term Neutral recommendation on Expeditors International. However, for the short-term (1-3 months) the company retains a Zacks #4 Rank (Sell).