Expeditors International of Washington
provoked a mini uproar last week by publicly humiliating a Bear Stearns analyst. But Expeditors' second-quarter earnings report -- to be released Tuesday -- may determine whether the company or the analyst has the last laugh.
Shares of the transportation logistics company skidded 11% last week after it filed a highly charged 8-K form with the
Securities and Exchange Commission
. The filing featured a stinging rebuke of Ed Wolfe, a Bear Stearns analyst with a negative rating on the company. He had previously asked whether his rating was the explanation for why his requests to visit Expeditors headquarters in Seattle went unanswered.
"It is clear you have lost your objectivity," the company fired back at Wolfe. It went on to ridicule him for missing the cue that "any 17-year-old boy would understand; you are not going to get your date."
This personal attack struck many on Wall Street as outrageous, and some tied it to last week's weakness in shares of Expeditors, one of the best-performing stocks of the decade. But Expeditors has long been infamous for 8-K filings with frank, irreverent and occasionally biting responses to analyst queries. (
Click here for some of Expeditors' greatest hits.)
The real reason for Expeditors' stock decline may be analysts' worries that the company's growth is coming under pressure in the short term. The company's business outlook, mentioned in the same notorious 8-K filing, has some analysts wondering whether it can "make the numbers" for the second quarter. Expeditors is expected to report earnings of 26 cents a share, according to Thomson First Call.
The company, which doesn't own ships or planes but manages critical air and sea freight deliveries for myriad companies, benefited from last year's dockworkers strike on the West Coast. But Expeditors, which has posted earnings growth of more than 20% range for most of its history, faces some tough comparisons this year.
"Based on the June air-cargo numbers in the 8-K, people are perceiving that this quarter is going to be weak because of tough
comparable sales," said Rich Eisinger, co-manager of the Mosaic Mid Cap fund, which has held Expeditors shares for about six years.
Wolfe, the maligned analyst at Bear Stearns, couldn't be reached for comment. But he also raised warning flags last week about Tuesday's earnings report. Reaffirming his underperform rating on Expeditors, Wolfe noted that a difficult second-half comparison could hamstring the stock. He recommended that clients take profits before the earnings call on Tuesday.
"Could EXPD see its first earnings miss in years?" Wolfe wrote. Expeditors more than likely will meet its numbers with low-quality earnings, he said, but "a modest miss could drive the stock to the mid to low end" of its recent $30 to $37 trading range.
Also spurring questions is the disclosure that Expeditors, the clear U.S. leader in international shipping, is "looking long and hard" at significantly expanding its business in the competitive domestic arena. In its filing, Expeditors said it has recruited individuals with domestic-shipping expertise and sees "a significant revenue opportunity."
The disclosure has prompted speculation that Expeditors is pursuing domestic shipping to counteract slower growth overseas. The analyst who queried Expeditors in the latest 8-K filing -- who remained anonymous -- noted that a domestic push would run counter to the company's earlier commitment to remain focused on international operations.
"The hint that they might consider a big move into the domestic air freight might give people the idea that growth is slowing internationally," Eisinger said. But he added: "I'm not concerned. This management team has proven themselves."
Indeed, most concerns about Expeditors are short-term in nature. Buy-and-hold fund firms such as Sequoia, Liberty Wanger and Mosaic have been longtime fans. Even Wolfe, in his most recent note, writes, "Longer term we would look for weakness in EXPD's stock as a potential entry point to own a quality name with a proven top flight management, unique culture and high end growth."
"Everybody knows there's a tough comparison in the back half, this is not new," said Alex Brand, an analyst at Virginia-based BB&T Capital Markets, who rates the stock buy with a $40 price target. "Almost every analyst on the Street is telling them that the back-half numbers are at risk, so they say you have to sell it or short it."
Far From the Wall Street Crowd
A typical CEO might sweet talk Wall Street into focusing on his company's long-term potential vs. any short-term challenges. But not Peter Rose, who over the past 22 years has built Expeditors into the dominant player in the freight-forwarding business, especially in the mushrooming Pacific Rim sphere. Rose has never depended on the kindness of Wall Street.
Because Expeditors has grown organically, Rose has little need for Wall Street underwriting services -- no acquisitions, no new offerings of stock or debt to raise money.
Expeditors' occasional ribbing of analysts traditionally hasn't hurt the stock. Its shares have climbed more than 30-fold over the past 15 years; it may be the only stock to more than double in 1999 and post three straight positive years in 2000 through 2002. The stock has always carried an above-average valuation, and has blown past the occasional analyst sell rating on valuation concerns.
One such rating -- underpeform -- came from Bear Stearns' Wolfe. While Wolfe wasn't mentioned by name in the filing, both Expeditors and Bear Stearns have confirmed that he was the target of the highly personal venom. Wolfe asked why Expeditors has refused to return his "many phone calls or emails" seeking a visit to the company's management. According to the 8-K filing, Wolfe wrote the company to ask: "Are we having this problem for the first time in the over five years we have covered Expeditors as a result of our current sell rating?"
In its reply, Expeditors acknowledged it has been ignoring the analyst and was trying to send a message that "any 17-year-old boy would understand; you are not going to get your date," as filed in the 8-K. Expeditors went on to say it has never refused an analyst access to management for a negative recommendation.
Why is Expeditors refusing Wolfe? In the filing, Expeditors indicates that Wolfe has been going beyond writing research notes on the company and has angered the company with some of his alleged conversations with clients. "From the messages you have left for people you likely assume are clients, it is clear that you have lost your objectivity," Expeditors wrote. "These are the words of your presumed clients. These same investors have gone on to urge that we have nothing more to do with you because of this loss of professional detachment."
Expeditors concluded with a nursery rhyme allusion to the Big Bad Wolf(e). "Go ahead and huff and puff. This company was not built from straw or sticks. It is made of cash and bricks. You're not going to blow it down and you're not getting in -- not by the hairs of your chinny chin chin!" (
Click here and scroll to question No. 3 to read the entire exchange.)
Expeditors refuses to play the earnings expectations game of offering to-the-penny estimates of quarterly growth. "We appear to be very competent at moving freight, but we have very little interest, and even less expertise, in reading tea leaves, entrails of owls, tarot cards or resorting to magical incantations hoping to divine our future," the company noted in a November 2000 8-K filing, responding to an analyst's request for more fourth-quarter guidance.
Morningstar's Nicolas Owens says Expeditors may be priced for perfection. "I'm not a market psychologist, so I can't explain the move this week, but I assign the stock a fair value of $36," said Morningstar's Nicolas Owens.
Earlier this week, R.W. Baird also raised questions about Expeditors valuation, but noted it would "be aggressive buyers in the lower-$30s." Mosaic Mid-Cap's Eisinger, a value-conscious skipper, said the stock "would have to get into the high $20s for it to be a screaming buy."
"This is a pretty liquid stock in the air freight and logistics sector, which makes it more exciting for analysts to tell people to short it," said BB&T's Brand. "I talk to hedge funds, too. And my advice is, just be prepared to cover your short pretty quickly."
Brand expects the Expeditors to post earnings of 27 cents a share, a penny better than expectations, based on Expeditors' remarks in the 8-K filing and signs he sees that economic activity is picking up.
"If things are getting better, it would stand to reason the logistics group is getting better," Brand says. "If you take marginal improvement and couple it with a company that regularly takes market share from competitors and performs well even in down times, it should be leveraged to do well."
In the final analysis, Brand said the long-term outlook on the company is so strong that it doesn't much matter whether it makes the quarter and the second-half numbers.
Eisinger agrees. "The shorts may be right and make money this quarter. I'll make my money in the long run."