Expeditors International of Washington Inc. ( EXPD - Analyst Report ) , one of the leading third-party logistics (3PL) providers, is slated to release its third quarter 2012 results on Tuesday, November 6. The current Zacks Consensus Estimate for the quarter is pegged at 43 cents per share, representing a year-over-year increase of 10.6%.

Second-Quarter Flashback

Expeditors’ second quarter adjusted earnings of 39 cents per share missed the Zacks Consensus Estimate of 43 cents and deteriorated 11% from 44 cents earned in the year-ago quarter. Weak revenues from air and ocean freight segments were primarily responsible for the underperformance.

Total revenue decreased 5% year over year to $1.5 billion, and missed the Zacks Consensus Estimate of $1.6 billion.

Agreement of Estimate Revisions

Estimate revisions for the company mostly show a downward trend.

For the third quarter, out of 17 estimates none moved upward, while one estimate was revised downward in the last 7 days. For the last 30 days, none of the estimates were revised upward, while five downward revisions were made.

For 2012, out of 18 estimates, no upward or downward revisions were made in the last 7 days. Over the last 30 days, no positive estimate revisions were made but three estimates were revised negatively.

For 2013, out of 18 estimates, one was revised positively, whereas no negative revision was registered in the last 7 days. Over the last 30 days, one each was revised in either direction.

We believe that if the company does not concentrate on higher cost pass through to customers, poor margin scenario will likely persist in the near term. We expect a negative impact on the company’s margins due to freight rate increases by third party carriers, particularly across Asia-U.S. trading networks.

On July 11, 2012, 15 ocean carriers operating in the eastbound Asia-to-U.S. trade represented by the Transpacific Stabilization Agreement (TSA) announced their largest rate increases for 2012.

Ocean freight margins are further expected to be negatively impacted as oceanliners are unlikely to offer any volume discounts. This may lead to higher freight rates that will affect freight forwarders' purchased transportation cost.

In addition, lower demand impacted by global economic slowdown would remain a constant headwind in the remainder of the year, resulting in below-average volume growth.

However, the company has been delivering solid net revenue and operating income backed by strong cost-control measures despite the downturn in global freight demand. These parameters could continue aiding earnings improvements for the company in the near term and beyond.

The company does not expect any headcount addition in the near term in proportion to volume growth, which indicates margin expansion.

Magnitude of Estimate Revisions

Over the last 7 the magnitude of the third quarter estimate revisions remained unchanged at 43 cents and dropped by a penny over the last 30 days.

For fiscal 2012, the Zacks Consensus Estimate remained static at $1.64 over the last 7 and 30 days.

Similarly, for fiscal 2013, the Zacks Consensus Estimate remained was $1.92, unchanged over the last 7 and 30 days.

Earnings Surprises

The company has delivered negative earnings surprises over the trailing four quarters with an average miss of 4.62%.

Our Recommendation

We remain encouraged by the company’s best in-class position in the 3PL market. We expect Expeditors to benefit from growing supply chains and capacity constraints in the freight market, thereby supporting pricing gains. Further, the company’s debt-free balance sheet is encouraging and provides flexibility for internal growth. Over the long term, Expeditors is poised for growth as it plans to expand its presence and operations internationally as well as invest in new opportunities and services.

However, intense competition from major rivals like CH Robinson Worldwide Inc. ( CHRW - Analyst Report ) and dependence on asset-based transportation providers may hinder its profitability over the long term.

We are currently maintaining our long-term Neutral recommendation on Expeditors International. The company retains a Zacks #3 Rank (a short-term Hold rating).