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May 4, 2006

Expeditious Dividends

There is no doubt that Expeditors International is a well-run company. The business bears no debt, consistently returns 20%+ on equity, grows revenue at a 15%+ clip, and has decent insider ownership... always a good sign. I have followed the shares for over a decade, though I have only mentioned them in passing once before in The DOCument and have not owned them for a long time. I follow the company because of its superb management and in hopes that one day it will once again be a value play.

Expeditors is a logistics services company that helps importers and exporters move products efficiently, as well as handle customs and regulations. Though unglamorous, the work is intense and quite specialized, and EXPD does a fantastic job of it. Since the company is based in Seattle, most of its business involves trade with Asian nations, and therefore the company's shares have been a popular addition to large fund portfolios. As a result, the share price has been driven through the roof.

Why do I mention all this today, you may ask? Simply because EXPD popped up on my screen as a big daily gainer, up nearly 20%. There was no earnings release... the company simply raised its dividend. However, the shares are thinly traded, and the news got a lot of big money chasing after them.

I use a simple spreadsheet, developed by a friend of mine, for equity value calculations, and I update the sheet for a number of companies on quarterly to annual bases. The sheet gives me a ballpark fair value and allows me to determine whether more in-depth research is warranted. The assumptions used in this spreadsheet are rather punishing. For example, I always us a 15% hurdle rate and always assume earnings will grow more slowly than the current 5-year growth rate. I don't manage a large fund, so I can afford to be more stringent with my pickings. My current fair value calculation for EXPD comes to $29 per share. A year ago, when the shares were trading in the high $40s, I was hoping a market blowout would bring EXPD into my target range. But the market didn't cooperate, and the shares shot higher, closing at $104 today.

Do I regret not owning the shares? Absolutely not. Conditions can change too quickly, and I want to have lots of risk built into my purchase price when I am investing. Interestingly, if I enter the current earnings growth rate for EXPD and loosen the hurdle rate to 9%... a rate used by many fund managers since they believe this is the long-term rate of return to be expected from stocks... the fair value comes out to $106. I don't see a lot of risk incorporated into this price, though. A trade war or large recession in China are two examples of what could bring these shares toppling. So for now I remain sidelined, waiting for more favorable days for investing.

Disclosure: None


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