Expeditors International Of Washington, Inc. EXPD's 8-K renders few surprises

EXPD released monthly 8-K. Yesterday EXPD released its 8-K in response to investor questions related to its 2Q:06 report on August 1st. There were no real surprises. Mgmt reported that strong air and ocean freight vols continued into July, remained upbeat about business prospects and gave 3Q:05 and 4Q:05 restated FAS 123R option expense impact for the upcoming comparison quarters.

Air and ocean freight volume growth strong. Mgmt stated that air and ocean vols were up, on average, 17 percent and 21 percent y-o-y during July (vs. 23 percent and 21 percent during June and 7 percent and 16 percent during July 2005). Given this vol update and factoring in fuel and ancillary surcharges, we estimate that air and ocean gross rev. are both tracking up about 21-22 percent during July. This is modestly above our 3Q expectations.

Restated 3Q:05 and 4Q:05 comparisons qtrs. Mgmt released restatement detail on incremental stock option expense associated with FAS 123R. The restatements will likely be followed by additional detail in the 10Q/Ks as reclassification detail was not included, although such detail will not affect either the Operating Income or Net Income lines. The impact is USD0.03 per quarter in 3Q:05 and 4Q:05, and a total of USD0.13 for F05, consistent with our prior projections.

F06 capex guidance reaffirmed. Mgmt reaffirmed prior guidance of USD160M of capex in F06 and explained that the USD100M of capex in 2Q was largely due to a USD70M real estate acquisition near Miami airport, acquired through a JV.

Tweaking EPS estimates; reiterate outperform. We’ve modestly lowered our C06 and C07 estimates from USD1.06 and USD1.30 to USD1.05 and USD1.29, due to rounding after we tweaked our assumptions post the 8-K. We continue to believe that EXPD will grow earnings in the 20-25percent range for the next several years regardless of the economy and that it should trade at about 30x forward P/E on a cash basis (excluding option expense), in-line with its five year average.

INVESTMENT CONCLUSION: Since reaching an all-time high of USD58.28 on 7/3/06 EXPD’s stock is down 30 percent, however the stock is still up 21 percent since the beginning of the year, compared to the S&P 500 up 1 percent and 2 percent over the same periods. This also compares to EXPD’s closest comps CHRW down 14 percent and up 26 percent and UTIW down 3 percent and 20 percent during these time periods.

Our sense is the recent weakness in EXPD’s stock has been driven in part by (1) the recent sell-off of transport names, mostly the result of investors rotating out of the transport sector (particularly the best performing names such as EXPD) later in the economic cycle; (2) modest downside 2Q results, mostly due to the high expectations set by 1Q results, and (3) our sense that the stock had gotten ahead of itself after several recent strong quarters.

EXPD has a twenty-five year track record for growing earnings through all economic cycles, and we view the stock as relatively a-cyclical or even counter-cyclical. In a potential slowdown, we expect EXPD to gain purchasing power with ocean and air providers and to expand gross yields, offsetting reduced volumes. EXPD is currently (based on yesterday’s close) trading at 33.4x and 18.7x our forward rolling EPS and EV/EBITDA estimates. On a cash (excluding option expense impact basis) EXPD is currently trading at 29.1x and 17.1x forward P/E and EV/EBITDA. This compares to its 1, 3 and 5 year historical average cash (historical EPS multiples are available on a non-cash basis) P/E and EV/EBITDA’s of 35.9x, 31.8x and 29.9x and 20.5x, 18.3x and 17.0x.

Our unchanged target price of USD45 assumes a 30x target forward cash P/E out five months from now on our then forward year C07 cash EPS estimate of USD1.50, excluding USD0.21 of stock options (modestly down from USD1.51 excluding USD0.21 of stock option). This implies a target GAAP P/E of 34x-35x our downwardly revised C07 EPS estimate of USD1.29. EXPD remains rated Outperform.