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J. Bruce Chan | (786) 257-2411 | [email protected] Equity Trading Desk | (800) 424-8870
July 22, 2019
Transportation & Logistics
INDUSTRY UPDATE
Soft Market Driven by Geopolitical Uncertainty, but Things Could Get Hairy in a Hurry: 2Q19Freight Forwarding Preview SummaryThe current freight forwarding environment is soft. But as is the nature of freight intermediary business models, most forwarders have been able to compensatewith better unit yields from lower capacity pricing. Geopolitical uncertainty continues to weigh on the industry and much of it has been priced into the stocks.But one risk that we believe has not been sufficiently encapsulated is IMO 2020. We think the impending low-sulfur mandate could drive significant grossmargin compression for many of the forwarders as early as 3Q, but more likely in 4Q19. Given current valuation levels, a tepid outlook and potential risk ahead,we are not recommending the international logistics names as a whole, preferring the domestic U.S. 3PLs instead, which we believe are more attractive ona relative risk/return basis.
Key Points
• Tariffs—real and threatened—are creating direct costs for imports and driving uncertainty amongst shippers. If antagonistic trade relations persist,we believe we could start to see more significant effects on fundamental demand as costs are passed through to consumers. The direct, negative modalimpact is most acute in ocean freight forwarding due to volume loss. But customs brokerage and 3PL/supply chain planning operations tend to benefit asshippers seek expertise in finding workarounds.
• But production sourcing shifts are not the answer to tariff woes. Contrary to popular belief, sourcing shifts cannot be effected quickly, and sometimes,they cannot be effected at all. Some operations are too complex to move elsewhere—shippers must consider product complexity, batch size, productioncapacity, distance from intermediate suppliers, proximity to raw material locations, and lack of logistics infrastructure. Sourcing shifts may add lead time andthus risk to the supply chain (e.g. in India, it can often take up to two weeks to move goods from an inland facility to the port). And sourcing shifts may comewith other costs that negate the savings on duties relative to the status quo. For example, more use of feeder capacity to and from hub ports.
• IMO 2020 is on the horizon, and could produce anywhere from $10-$30bn in direct costs. The container lines have historically done a poor job ofpassing costs through, but given the scale involved here, we believe there is no alternative. Those touched by the first derivative impacts have been planningappropriately, but second and third derivative affectees have not, in our view, and could see a 30% or greater increase in surcharges on major lanes.
• While public market valuations have cooled, the M&A landscape remains hot. Lane-level scale is becoming more important as shippers becomemore surgical with their supply chains. Also, freight forwarders are looking to niche specialization to drive high-margin value-added services. Competitivepressure continues to form around the fringes of the industry a la container lines expanding into broader logistics functions. And, finally, while the digitaldisruption threat has matured and mellowed, the need to innovate and invest significantly in technology is strong as ever. We believe these trends will drivea continuation of the current, elevated pace of M&A.
• Ocean Forwarding: tepid volumes and potential gross margin squeeze in 2H19 as IMO 2020 decends
• Global ocean volumes continue to decelerate in line with global GDP. At least part of the slowing is related to the absence of tariff pre-shippingactivity, which was evident in North American container import volumes (see Exhibit 9). To the extent that freight forwarders like Expeditors have avoidedvolume cooling due to exposure to this lane, we expect that boost to go away in 2Q19. In 2019, we expect global ocean forwarding market volumesto grow by around 2% y/y.
• Ocean yields for the freight forwarders have been neutral to improving as underlying capacity pricing has been under pressure. However, IMO2020 could take capacity rates up significantly as early as 3Q19, which would squeeze forwarder gross margins, all else equal. Our outlookfor unit yields is 0%-1% for the market in 2019.
• Airfreight Forwarding: market firmly in contraction, looser capacity may help yields; e-commerce a modest structural tailwind
• Global airfreight volumes are firmly in contraction territory, and 2Q19 will get worse, in our view. However, if there is a favorable resolution oftrade tensions, we may see a short-term need for sudden inventory replenishment that could drive market volumes beyond our current 2019 forecastof (1%)-0% y/y growth.
• Airfreight forwarding yields (GP/ton), though, should generally remain favorable, helped by balanced-to-soft underlying capacity pricing. Weanticipate ~3% y/y expansion on this front for the overall market.
• INVESTMENT CONCLUSIONS: valuations for most of the forwarders are still trading at 10-year mean levels despite top line challenges and loominggeopolitical risk factors, so we believe the group is fairly valued. Even DSV A/S (DSV-DK, DKK 631.60, Hold)^, which is a best-in-class operator, is subjectto those pressures and risks from the pending merger with Panalpina, hence our move to the sidelines. All else being equal, we prefer the domestic logisticsnames for their more favorable risk/return profile, exposure to U.S. domestic secular outsourcing tailwinds, and the over-cooked disruption threat thesis.These names include small cap Echo Global Logistics (ECHO, $19.13, Buy), mid-cap Landstar System (LSTR, $110.77, Buy), and large cap C.H. RobinsonWorldwide, Inc. (CHRW, $83.22, Buy).
Note: prices are as of close on 07/22/19 unless stated otherwise
All relevant disclosures and certifications appear on pages 32 - 33 of this report.
Stifel does and seeks to do business with companies covered in its research reports. As a result, investors should be aware thatthe firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report asonly a single factor in making their investment decision.
^ DSV is intended for distribution to or use by institutional clients only, as the securities of this company mentioned in this report may not be registeredin certain states or other jurisdictions and as a result, the securities may not be eligible for sale in some states or jurisdictions. Additionally, the securities ofnon-U.S. issuers may not be registered with, nor be subject to the reporting requirements of, the U.S. Securities and Exchange Commission. The informationcontained herein is not an offer to sell or the solicitation of an offer to buy any security in any state or jurisdiction where such an offer or solicitation wouldbe illegal.
Industry Update
July 22, 2019
2
COMPANY CAPSULE SUMMARIES
C.H. Robinson Global Forwarding (CHRW, USD 83.22, Buy)
As the largest 3PL in North America, C.H. Robinson has begun to diversify away from its core North American Surface
Transportation (NAST) business, and expand its global offerings in search of higher growth. In 2012, the purchased Phoenix
International of $635mm, significantly augmenting its freight forwarding capability, especially on the Asia-U.S. Eastbound
Transpacific route, where it is now a dominant NVO. Since Phoenix, Robinson has adopted a strategy of predominantly agent-
based tuck-in acquisitions to fill out geographic whitespace, including the 2016 acquisition of Australia-based APC Logistics and
the 2017 acquisition of Canada-based Milgram & Company. More recently, the company acquired Spain’s Space Cargo Group
in a €42mm (~$48mm) tuck-in that bolsters the company’s trans-Atlantic density—currently a high growth lane. Although smaller
in stature than most of its peers covered here, Robinson’s Global Forwarding division is growing nicely, helped by commercial
synergies from its NAST business unit and what we believe to be one of the better global transportation management platforms
in the business (Navisphere). As the division builds density, deploys new systems capabilities, automates processes, and
continues to integrate its constituent bolt-ons, we believe there is meaningful room for margin growth as Robinson Global
Forwarding climbs toward peer EBIT conversion levels.
DHL Global Forwarding, Freight (DPW.DE, EUR 29.48, Buy, covered by our colleague David Ross)
It’s just one division within global logistics giant Deutsche Post A.G., but DHL Global Forwarding, Freight (DGFF) is still the
largest global airfreight forwarder and second largest ocean freight forwarder by volume. Going forward, though, we believe the
division will primarily be focused on EBIT improvement over market share, at least for now. The segment has been rebooted
after a failed technology and process transformation initiative in 2016 called NFE (New Forwarding Environment), which sought
to upend traditional forwarding processes in favor of those used in the company’s more sophisticated Express business.
However, this transformation proved too big a bite, and management opted to can the EUR 350mm project. Former Kuehne
Nagel Alumnus Tim Scharwath is now at the helm of DGFF and is implementing more digestible incremental improvements,
including the rollout of the CargoWise One operating system—a modular cloud-based TMS that has been used with great
success by Danish rivals DSV (among a few others). Though still a way away from margin leaders like Expeditors and DSV,
DGFF has made good progress with EBIT expansion this year. Already back to prior-peak levels (15.5% on an LTM basis), it
should continue to see improvement as it moves toward management’s reiterated target of 20% by 2020.
^DSV A/S (DSV.DK, DKK 631.60, Hold)
DSV is now a top-5 global freight forwarder by revenue and the leading forwarder in terms of profitability. The company has
achieved its station as a best-in-class operator via strong culture, management and technology. After a successful $4.6bn bid for
Swiss competitor Panalpina World Transport earlier this year, DSV will be even bigger. The timeline for deal close is around
4Q19 and the process has been going smoothly so far, in our view. DSV has a long history of growth via M&A, crowned by its
$1.4bn acquisition of Long Beach, CA-based UTi Worldwide in 2016. By most objective standards, the integration of
beleaguered UTi was a resounding success, with the company outperforming integration timelines and accretion targets,
especially in its core forwarding division. While many factors contributed to this success, we believe the company’s excellent
change management focus, its data-driven approach to performance accountability at all levels of the organization and its
highly-scalable IT systems, including a robust integration backbone, were some of the primary drivers. But there are some key
differences this time around. Panalpina is meaningfully larger than UTi, and it also comes with a more entrenched culture,
greater commercial overlap and risks greater operational dilution, so investors need to be realistic about accretion timelines.
These factors could be key differentiators between UTi’s faster-than-expected integration, and a lengthier, messier process, in
our view. Ultimately, we think the deal will create a bigger, better entity, but the timeline likely exceeds our current 12-24 month
investment horizon, and we are stepping to the sidelines with a Hold rating.
Industry Update
July 22, 2019
3
Expeditors International of Washington, Inc. (EXPD, USD 74.67, Hold)
Based in Seattle, WA, Expeditors is an international freight forwarder and customs broker that really hit its stride in the 1990s
and early 2000s along with globalization outsourcing and the trans-Pacific airfreight tech boom. Since that time, the company
has maintained focus on the trans-Pacific trade lane, but growth matured along with the eastbound transPac market. In 2015,
with a new CEO at the helm, management announced a renewed focus on growth and market share, especially in Asia and
Europe, where historically, it had a relatively small penetration. Although that process has been slow, the company has
benefited from relative strength in U.S. import demand markets, as well as growth in its “other” business lines, including customs
brokerage—a high margin and extremely sticky service line—and its door-to-door transcon offering. In terms of its longer-term
competitive positioning, Expeditors is known for its strong culture, a tenet of which is a highly variable incentive comp structure
which promotes tenure and experience while maintaining operational flexibility in downturns. The company has also been
regarded for its early lead in technology and systems investment, and was—and still is—one of the rare operators with an
entirely bespoke IT platform. While Expeditors has made incremental investments in this platform, we believe it is starting to
show signs of its age, and without material capital expenditures in the coming years—and potentially a major overhaul—the
company risks losing a competitive technology edge, which is become more important as digitization takes hold.
Kuehne + Nagel A.G. (KNIN.SIX, CHF 145.00, Hold)
Kuehne Nagel is a global forwarding and logistics juggernaut, leading the industry in ocean freight forwarding market share, and
raking second in airfreight forwarding behind DHL. The company also offers significant road, rail and contract logistics services
within its portfolio. The company has long been viewed as an operational leader, with very good margins, balance sheet and
cash flow. The company is also one of the most forward thinking and innovative in the space, in our view, with aggressive
pushes into fully automated eTouch booking, and a raft of digital tools on both the back-end and customer facing side. These
digitization efforts are borne partially by necessity, since the company has a large exposure to more commoditized port-to-port
ocean freight moves. As such, the emphasis in the future will be less on growth and more on margin improvement in ocean, as
well as on growth in other divisions. Historically, the company has favored bolt-on acquisitions to fill out geographic or service
line holes and has tended to avoid major transformational deals. For example, in 2015, Memphis-based ReTrans gave the
company a solid foothold in domestic U.S. distribution, and more recently, the acquisition of Quick International Courier added
new capabilities in the time-critical, “next flight out” shipments, particularly in the aviation and pharmaceutical industries. In line
with its operational, financial and technological leadership, however, Kuehne Nagel historically trades at a valuation premium to
match, with more investor focus on yield than on earnings growth, in our view.
Panalpina World Transport A.G. (PWTN.SIX, CHF 218.60, Sell)
Based in Basel, Switzerland, Panalpina is a top-20 global logistics company focusing on air and ocean forwarding, as well as
value-added warehousing services. The company has historically had a bias toward airfreight and offers a unique dedicated
capacity model that is particularly attractive to time, service, and capacity-sensitive customers. Panalpina is a strong legacy
brand with a well-regarded offering, but the company has been operationally mired in a messy business transformation, which
includes a transition to SAP-TM—the system that DHL DGFF discarded after investing EUR 350mm. Amidst what we view as a
clumsy IT and process rollout, Panalpina has seen significant earnings deterioration and stagnant growth relative to peers and
the company remains a laggard in its comp set on nearly all operational and financial metrics. Management’s path forward and
its mid-term targets were idyllic at best and impossible at worst, in our view, and the company was likely headed for years of
further difficulty. Enter DSV ex machina: with the acquisition set to close in 4Q19, the hope is that DSV’s lean operating culture
and robust systems architecture can supplement Panalpina’s commercial offering.
Industry Update
July 22, 2019
4
OCEAN FREIGHT FORWARDING
OVERVIEW
The underlying global ocean container market is the primary source of capacity for the world’s goods, responsible for over 90%
of international non-bulk cargo movements. Throughout much of the 1990s and early 2000s, supply chains were globalizing and
mature economies sought to capitalize on cheap labor available in growing economies—particularly in China. As a result, global
trade was expanding at a multiple of global GDP. However, as the globalization megatrend has matured and as shippers have
begun to consider total-landed costs—factoring in non-labor costs like fuel, inventory carrying, and supply chain risk in the
overall supply chain equation—the automatic rush to offshore has slowed. The new reality, in our view, is that supply chains that
moved half-way around the world are by definition moving closer to their consumption points. As a result, international trade now
tends to move more in line with global GDP (see Exhibit 1).
Exhibit 1: Merchandise exports as a multiple of global GDP fell from 1.5-2.0x to a level closer to 1.0x as
supply chain globalization has matured
Source: IMF World Economic Outlook Database (October 2017), Stifel format
In Exhibit 2, we take a look at the underlying ocean capacity environment. Leading into the global financial crisis and amidst
elevated oil prices, container lines began adding capacity via ultra-large container vessels. The motivation was simply to find
economies of scale in variable operating costs—namely, fuel—and improve slot cost efficiency. Since no carrier wanted to be
left behind, most sought to implement these larger ships on core headhaul trade lanes. Vessel order books swelled as this
perverse incentive took hold, flooding the market with new capacity. Since the financial crisis, the order book has generally been
shrinking, but not by enough, in our view. There have been efforts to rationalize capacity over the past few years, as seen in the
wake of the Hanjin bankruptcy in late 2016. But long-term capacity continues to exceed demand (see Exhibit 3). More recently,
carriers have been entering into various alliances and vessel sharing arrangements, and there has been clear consolidation
among the world’s largest vessel operators (see Exhibit 4). But again, these changes have not produced any clear and
consistent evidence of capacity discipline, at least yet, in our view.
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Industry Update
July 22, 2019
5
Exhibit 2: The Container order book swelled leading into the global financial crisis; since then, it has
been shrinking, but not by enough, in our view
Source: Clarksons Research
Exhibit 3: The global fleet saw a period of rationalization post Hanjin bankruptcy, but total TEU
development climbed through 2018 and continues to outpace network demand growth
Source: Clarksons Research, Container Trade Statistics, Ltd.
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Supply (Container Fleet Development, TEUs)
Demand (Global Trade, TEUs)
Fleet Capacity 5 yr CAGR: 4.1%
Trade Volume 5 yr CAGR: 4.8%
Industry Update
July 22, 2019
6
Exhibit 4: The past few years have seen consolidation among the world’s container line capacity, via
bankruptcy (Hanjin) and Alliances and Vessel Sharing Arrangements, but overall capacity has still
grown faster than demand
2019 Container Shipping Market 2015 Container Shipping Market
21.9mm TEUs 19.3mm TEUs
Source: Company data, NYK Line Investor Presentations, Stifel format
As a result of this capacity dynamic, pricing power has often been poor and even non-compensatory, forcing container ship
operators to seek big rate increases in contract negotiations and then watch those increases erode through market forces as the
contract cycle wears on. For the freight forwarders that serve as intermediary brokers of seaborne capacity, this pricing volatility
creates periods of gross margin compression as underlying prices increase faster than can be passed through to shipper-
customers, followed by periods of gross margin expansion as underlying prices fall. Effective capacity planning, scale, lane
exposure, business mix (including the mix of value-added services) and the suddenness of underlying capacity pricing moves
are some of the factors that influence the extent to which forwarder gross margins expand and contract. All else being equal,
freight forwarders prefer higher base container rates, even if mathematically it makes overall gross margins looks smaller (see
Exhibit 5). For one thing, the optic to a shipper is that a higher base rate makes the forwarder markup smaller as a percentage
of the overall freight bill. And more importantly, short-term fluctuations in the spread between buy and sell rates are less
meaningful than longer-term growth of overall net revenue dollars, especially on a per unit basis, because outside of the
purchased transportation cost, the cost to handle and process a shipment tends to remain fairly constant, all else being equal.
Maersk 3,981 18%
MSC 3,228 15%
COSCO 2,764 13%
CMA CGM 2,596 12%
Hapag-Lloyd 1,584 7%
ONE 1,535 7%
Evergreen 1,200 5%
Yang Ming 607 3%
PIL 430 2%
HMM 412 2%
ZIM 307 1%
Wan Hai 243 1%
Others 3,053 14%
⬛ 2M Alliance (and partners) ⬛ Ocean Alliance ⬛ THE Alliance
Maersk 3,053 16%
MSC 2,680 14%
CMA CGM 1,791 9%
Hapag-Lloyd 958 5%
Evergreen 946 5%
COSCO 866 4%
CSCL 702 4%
Hamburg Süd 625 3%
Hanjin 622 3%
OOCL 591 3%
MOL 585 3%
APL 556 3%
Yang Ming 530 3%
NYK Line 516 3%
UASC 450 2%
KL 399 2%
PIL 384 2%
HMM 380 2%
Others 2,708 14%
Industry Update
July 22, 2019
7
Exhibit 5: While there is much focus in the investment community on gross margins, forwarders prefer
to maximize absolute net revenue dollars (per unit), all else equal, because their cost to handle and
process each shipment tends to remain relatively constant outside of the purchased capacity buy rate
A B Comments
Gross Revenue $ 100 $150
less: Purchased Transportation 65 105
Net Revenue 35 45
Gross Margin % 35% > 30% ▪ Scenario A carriers a higher gross margin percentage
Less: Handling Costs 20 20 ▪ But handling costs per unit tend to remain fairly constant, all else equal
Profit $15 < $25 ▪ Meaning better profitability on higher absolute net revenue dollars
Unit Conversion Ratio 43% < 56% ▪ Unit (or overall) conversion ratio is the most important metric
Source: Stifel
Exhibit 6: Ostensibly, freight forwarders help a vast pool of diffuse shippers arrange port-to-port
freight moves across a variety of lanes, but this service tends to be fairly commoditized. Additional
margin opportunity and a deeper moat exists in providing value added services, including, but
certainly not limited to those listed below
ORIGIN TRANSIT DESTINATION
◾Origin handling ◾Port-to-port move ◾Customs brokerage
◾Order management ◾Destination handling
◾Consolidation ◾Storage
◾Digital cargo ◾Drayage
◾Drayage ◾Deconsolidation
◾Network planning/optimization ◾Freight bill payment & audit
Source: Stifel
Within ocean freight forwarding, there are a number of sub-services that a provider may offer, including direct forwarding
services, consolidation, order management, customs brokerage, document handling and processing, freight payment and audit,
cargo storage and handling, and network planning and optimization (see Exhibit 6). Direct forwarding moves are an important
function in the supply chain and the forwarder may act as a point of capacity consolidation for an extremely diffuse population of
small shippers. But the reality is that it tends to be fairly commoditized, and in the digital age, better price discovery and
transparency have put structural pressure on yields. Freight forwarders are generally better-served by maximizing their exposure
to value-added services, which typically carry higher margins, better competitive differentiation and are stickier with customers.
Industry Update
July 22, 2019
8
That said, digitization, better data and systems integration, and machine learning algorithms are making it possible to partially or
even fully automate some of the more basic and more commoditized services. New “disruptive” entrants like Flexport and new
digital marketplaces like Freightos and NYSHEX have made a big splash and helped pioneer new technology and new ways to
reach shippers. But the old guard has not be sitting idle. Kuehne Nagel, for example, is at the forefront of supply chain
digitization, in our view, most notably through its eTouch shipment automation initiatives, which could address up to 20% of
ocean shipments in its network. Likewise, C.H. Robinson is investing heavily in data analytics and building full end-to-end
supply chain visibility and intelligence. So while there is significant technological disruption happening right now in ocean
forwarding, it is not coming from just new players, in our view. In fact, we believe that much of the shakeup will happen at the
bottom-end of the freight forwarding market, which has long been populated by a fragmented set of “mom and pop” players, who
have depended on local relationships to access customers. That process should continue to give way to digital booking, in our
view. While well-capitalized digital entrants have emerged, they are competing with a likewise well-capitalized, sophisticated
field of incumbents that continues to consolidate scale, capital, and technology.
Exhibit 7: While the freight forwarding market is very fragmented, there is a very large cohort of well-
capitalized, (mostly) technologically sophisticated, global incumbents that continues to consolidate
the top end of the market through organic and M&A-related means. Ultimately, we believe there is more
opportunity for digital and automated booking at the bottom end of the market
Rank Ocean Freight Forwarder Headquarters Ocean TEUs
1 Kuehne + Nagel Switzerland 4,355,000
2 Sinotrans China 3,360,300
3 DHL Global Forwarding, Freight Germany 3,259,000
4 DB Schenker Germany 2,169,000
5 Panalpina Switzerland 1,520,500
6 DSV Denmark 1,389,611
7 Expeditors United States 1,070,424
8 Kerry Logistics Hong Kong 1,053,485
9 Hellmann Worldwide Logistics Germany 897,379
10 Bolloré Logistics France 864,000
11 LF Logistics Hong Kong 778,796
12 Yusen Logistics Japan 774,822
13 Agility Kuwait 740,000
14 CEVA Logistics Switzerland 729,000
15 C.H. Robinson Global Forwarding United States 698,000
16 GEODIS France 690,000
17 Damco Netherlands 664,448
18 Kintetsu World Express Japan 663,915
19 UPS Supply Chain Solutions United States 600,000
19 OOCL Logistics Hong Kong 600,000
19 Logwin Luxembourg 600,000
19 Nippon Express Japan 600,000
20 DACHSER Germany 522,300**
21 Worldwide Logistics Group China 508,732
22 Hitachi Transport System Japan 500,000
*Ocean TEUs are company reported or Armstrong & Associates, Inc. estimates. **Includes LCL shipments. Stifel covered companies listed in light blue Source: Armstrong & Associates, Inc. Who’s Who in Logistics Online 3PL Guide; Company Reports
Industry Update
July 22, 2019
9
OCEAN FREIGHT VOLUMES
Global ocean freight volumes have decelerated (see Exhibit 8), especially on core trades. The slowing is due partially to
geopolitical uncertainty, in our view. For example, North American import volumes surged ahead of planned tariffs as shippers
sought to front-load inventories and avoid duties (see Exhibit 9). U.S. West Coast Ports, in particular, experienced record
throughput toward the end of 2018 (Exhibit 10), which benefited freight forwarders with a legacy bias toward the Asia-to-U.S.
trade lane like C.H. Robinson and Expeditors International (see Exhibit 11). Looking ahead, volumes should track at a more
normalized rate, in line with GDP at a modest 2% of 2019 and 2.5% for 2020, in our view.
Exhibit 8: Global ocean freight volumes have decelerated after a period of strong demand
Source: Container Trade Statistics, Ltd.
Exhibit 9: North American import volumes swelled in late 2018 in anticipation of punitive tariffs
Note: First quarter volumes normalized for the impact of the Lunar New Year Source: Container Trade Statistics, Ltd., Stifel estimates
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15%
20%
Nov-1
6
Dec-1
6
Jan
-17
Fe
b-1
7
Ma
r-1
7
Ap
r-17
Ma
y-1
7
Jun
-17
Jul-
17
Au
g-1
7
Se
p-1
7
Oct-
17
Nov-1
7
Dec-1
7
Jan
-18
Fe
b-1
8
Ma
r-1
8
Ap
r-18
Ma
y-1
8
Jun
-18
Jul-
18
Au
g-1
8
Se
p-1
8
Oct-
18
Nov-1
8
Dec-1
8
Jan
-19
Fe
b-1
9
Ma
r-1
9
Ap
r-19
Ma
y-1
9
No
rth
Am
eri
ca
n D
ry &
Ref
TE
Us
Y
/Y %
Cha
ng
e (
ex.
Intr
a-r
eg
ion
al t
rad
e)
Exports
ImportsPre-Tariff Inventory Build
Industry Update
July 22, 2019
10
Exhibit 10: Inventory pre-loading helped drive record throughput at U.S. West Coast Ports in late 2018,
but growth has since gone negative in May and June as pre-shipping has subsided and we come up
against a strong fundamental comp from early 2018
Source: Ports of Long Beach, Los Angeles, Oakland, and Seattle; Stifel format
Exhibit 11: To the extent that freight forwarders have outperformed the broader ocean freight market
due to exposure to strong Asia-U.S. demand (like Expeditors, in our view), growth may slow as pre-
shipping activities subside
Source: Company data, Stifel estimates
(40%)
(30%)
(20%)
(10%)
0%
10%
20%
30%
40%
50%
0
150
300
450
600
750
900
1,050
1,200
1,350
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
1Q
17
2Q
17
3Q
17
4Q
17
1Q
18
2Q
18
3Q
18
4Q
18
1Q
19
2Q
19
Imp
ort
TE
Us
(F
ull,
th
ou
sa
nd
s)
Long BeachLos AngelesOaklandSeattleUSWC Import TEUs Y/Y % Chg
(10%)
(5%)
0%
5%
10%
15%
20%
25%
30%
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
1Q
17
2Q
17
3Q
17
4Q
17
1Q
18
2Q
18
3Q
18
4Q
18
1Q
19
2Q
19
Oc
ea
n F
reig
ht
TE
Us
- Y
/Y %
Ch
an
ge
Market CEVA
CHRW DHL-GF
DSV EXPD
KNIN PWTN
Industry Update
July 22, 2019
11
OCEAN FREIGHT PRICING
Core ocean headhaul trades China to N. Europe and China to the U.S. West Coast continue to see negative y/y comparisons
and flattish growth, respectively, on underlying rates (Exhibits 12-13). This trend is due to soft demand and fundamental
overcapacity, especially on the European inbound. This trend may not be surprising given the difficult demand comparisons from
2018, which saw good fundamental global economic growth moving into the beginnings of tariff inventory pre-loading. But, given
significant fuel-related costs from the pending implementation of IMO 2020, we believe underlying capacity pricing could
increase sharply in late 3Q19 and throughout 4Q19. Assuming that carriers are able to pass through the majority of these costs,
ocean freight forwarders could see meaningful gross margin compression as capacity buy rates climb faster than sell rates,
which would inhibit earnings until prices return to equilibrium, in our view. Unlike the China-based trades, trans-Atlantic volumes
have been solid and pricing has been more stable (see Exhibit 14). These lanes certainly still have the potential for IMO-related
cost increases, and thus gross margin pressure. But we believe that a more sustainable pricing base should help to dampen the
ill-effects.
Exhibit 12: As the largest global ocean trade, China to North Europe has and continues to see the
greatest influx of large vessel capacity. As a result, year-over-year continues to trend negatively, but
this could change if near-term carrier capacity management is successful, or if IMO-related costs drive
pricing significantly higher
Source: Freightos Baltic Index
(40%)
(30%)
(20%)
(10%)
0%
10%
20%
30%
40%
($2,500)
($2,000)
($1,500)
($1,000)
($500)
$0
$500
$1,000
$1,500
$2,000
$2,500
Jan
18
Fe
b 1
8
Ap
r 18
Jun
18
Jul 18
Se
p 1
8
Oct
18
Dec 1
8
Fe
b 1
9
Ma
r 1
9
Ma
y 1
9
Jun
19
Y/Y
% C
ha
ng
e
Ch
ina
/ E
as
t A
sia
to
N.
Eu
rop
e China to N. Europe Y/Y % Δ
Industry Update
July 22, 2019
12
Exhibit 13: Likewise, the China to U.S. West Coast Lane has seen demand-led loosening, which has
resulted in rather pedestrian rate increases with the impending regulatory implementation
Source: Freightos Baltic Index
Exhibit 14: Demand on the trans-Atlantic has been solid, which is reflected by improved pricing
comparisons on the U.S. East Coast
Source: Freightos Baltic Index
(40%)
(20%)
0%
20%
40%
60%
80%
100%
120%
($1,000)
($500)
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000Jan
18
Fe
b 1
8
Ap
r 18
Jun
18
Jul 18
Se
p 1
8
Oct
18
Dec 1
8
Fe
b 1
9
Ma
r 1
9
Ma
y 1
9
Jun
19
Y/Y
% C
ha
ng
e
Ch
ina
/ E
as
t A
sia
to
N.
Am
eri
ca
We
st
Co
as
t China to USWC Y/Y % Δ
(75%)
(50%)
(25%)
0%
25%
50%
75%
100%
125%
150%
Jan
18
Fe
b 1
8
Ma
r 1
8
Ap
r 18
Ma
y 1
8
Jun
18
Jul 18
Au
g 1
8
Se
p 1
8
Oct
18
Nov 1
8
Dec 1
8
Jan
19
Fe
b 1
9
Ma
r 1
9
Ap
r 19
Ma
y 1
9
Jun
19
N. A
me
ric
a E
as
t C
oa
st
to E
uro
pe
USEC to Europe Europe to USEC
Industry Update
July 22, 2019
13
Exhibit 15: Softness in underlying ocean rates has directionally been helping with forwarder GP/TEU.
That trend is likely to continue, in our view, for 2Q19, and potentially into 3Q19. However, as the costs
of IMO 2020 set in, we anticipate a rapid tightening in rates, which would likely constrain unitary yield,
all else equal
Source: Company data, Stifel estimates
(20%)
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
25%
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
1Q
17
2Q
17
3Q
17
4Q
17
1Q
18
2Q
18
3Q
18
4Q
18
1Q
19
2Q
19
Oc
ea
n F
reig
ht
GP
/TE
U -
Y/Y
% C
ha
ng
e
CEVA CHRW
DHL-GF DSV
EXPD KNIN
PWTN
Industry Update
July 22, 2019
14
AIRFREIGHT FORWARDING
AIRFREIGHT OVERVIEW
At roughly 10x the cost of an equivalent ocean freight shipment, airfreight demand tends to be a bit more elastic, although there
are applications that may exist regardless of economic cycle, in our view. Traditionally, there have been three common use
cases for airfreight, which include physical perishability, high value goods and products that are critical to broader operations or
processes (see Exhibit 16). However, a fourth use case has been emerging over the last few years that we believe is a secular
offset to otherwise cyclical demand cycles: e-commerce.
All else being equal, e-commerce tends to carry a lower unitary yield than other commodity classes given its low density
characteristics. Goods may be individually lower-value, but shorter cycle times, smaller lot sizes, high SKU counts and volatile
inventory prioritize lower-risk, lower-handling, higher speed modes, and makes a structural case for airfreight usage (see
Exhibit 17). Thus, the upshot is that consistent growth in e-commerce (see Exhibit 18) should smooth demand cycles in
airfreight going forward, all else equal, even if other traditional drivers are slowing.
Exhibit 16: Air cargo use cases include shippers with perishable, high-valued, process impairing, or
international e-commerce derived products
Air Cargo Use Cases
Physically Perishable
Products that physically deteriorate or spoil over time, making them ineligible for long shipment and storage times
High Value & High Unit Value
Products with a high ratio of value to weight / density, and travel by air to mitigate the risk of transportation
Economic Process Impairment
Products that may be low value but are tied to a larger production process that is time-critical or has costly service disruptions
International E-Commerce Products where demand is driven by increasing globalization and
usually have small lot size, low unit value and an intercontinental origin and destination
Source: Logistics Capital & Strategy
Industry Update
July 22, 2019
15
Exhibit 17: E-Commerce demand is pushing the supply chain towards faster, lighter shipments. In
many case, higher speed and the need for fewer handlings and modal transitions will justify the higher
cost of airfreight
Source: Logistics Capital & Strategy
Homo SKU
FCL (FEU)
3 days
FCL
Intermodal
15,000 kg
Hetero SKU
Factory U.S. Port Trainload Rail RampDistribution
Center
China
HKG LAX ONT DFW DFW
“Build to
Order”
45 days 15 days 30 days 1 day
Drayage
(FCL)FCL
Retailer
Store
Store
StoreDCC
(FTL)
LTL
Households
30 days 1 day~125 days
⮟ Volume
⮝ High Value SKU
LTL
Walmart, Target, Best Buy
Vendor Origin
Consolidation
Conventional Retail Supply ChainEOQ = 10,000-50,000kg
Factory
China
HKG
Fulfillment
by Amazon
Forwarding
Center
Air
1,000-2,000 kg
(pallet)
5kg
5kg
5kg
Stock level =
Amazon threshold“Build to
Stock”
Weekly cycle
E-Commerce Retail Supply ChainEOQ = 1,000-2,000kg
Industry Update
July 22, 2019
16
Exhibit 18: Structural e-commerce growth will continue to outpace global GDP, particularly in the U.S.
and Asia, where it will hit well into double-digit territory on a compound annual basis
U.S. E-Commerce Growth: 2012-2022E USD (billions)
USD (billions) CAGR%
2012-2022
13.1%
Rest of World E-Commerce Growth: 2012-2022E
USD (billions) CAGR%
2012-2022
AS
19.0% EU 8.9%
LA 3.8%
ROW
19.6%
AS = Asia, EU = Europe, LA = Latin America, ROW = Rest of World Source: Logistics Capital & Strategy, Euromonitor
Another interesting dynamic related to e-commerce is its impact on capacity and capacity types. Up until four or five years ago,
the demise of the main deck freighter was almost a foregone conclusion, in our view. Global demand for passenger airline travel
continues to increase. And because belly space grows with passenger demand, overall airfreight capacity was and continues to
increase with little direct correlation to underlying cargo economics. However, some freight is not conducive to belly capacity,
and in many cases, this includes e-commerce freight. Where cargo service needs do not comport with passenger schedules
(e.g. overnight flights) or passenger routes and gateways, dedicated freighter aircraft may be required. That said, with a cooling
of global air cargo demand since 2017 and 2018 and the perennial influx of belly space, underlying airfreight capacity continues
to loosen (see Exhibit 19) and pricing has come under pressure.
As with ocean freight (discussed infra), forwarders generally prefer a higher base airfreight rate because it decreases the
intermediary markup as a percentage of the overall bill, all else equal, the directional decline in capacity rates should be a
positive for gross margins to the extent that buy rates are decreasing faster than sell rates. Of course, different forwarders may
have a different experience in the market depending upon lane exposure, mix dynamics, and capacity management, but overall,
we expect the yield environment to be stable for the balance of 2019, to the tune of about 3%-3.5% growth year-over-year.
181.7 212 240.4 276.6
312.1 351.4
394.9 443.1
496.4 555.7
622.1
2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E
181
234 327 430 537
620
699
775 862
941
1,0
28
180
215
246
236
255
273
302
335
364
393
423
18
21
25
24
25
25
26
28
29
28
26
14
18
23
26
30
36
43
50
59
69
81
2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E
AS EU LA ROW
Industry Update
July 22, 2019
17
Exhibit 19: Overall airfreight supply has been increasing consistently, in part due to rising passenger demand and associated belly capacity growth. Meanwhile, demand has come off 2017-2018 peak levels
Source: International Air Transport Association
Exhibit 20: The overall air forwarding market is very fragmented, but it is consolidating, especially at
the top, as scale, global breadth and technological sophistication become more important
Rank Airfreight Forwarder Headquarters Metric Tons*
1 DHL Global Forwarding, Freight Germany 2,150,000
2 Kuehne + Nagel Switzerland 1,743,000
3 DB Schenker Germany 1,304,000
4 Panalpina Switzerland 1,038,700
5 Expeditors United States 1,011,563
6 UPS Supply Chain Solutions United States 935,300
7 Nippon Express Japan 899,116
8 Bolloré Logistics France 690,000
9 DSV Denmark 689,045
10 Kintetsu World Express Japan 600,849
11 Hellmann Worldwide Logistics Germany 578,007
12 Sinotrans China 530,100
13 CEVA Logistics Switzerland 476,600
14 Apex Logistics International China 430,000
15 Agility Kuwait 415,000
16 Kerry Logistics Hong Kong 409,127
17 Yusen Logistics/NYK Logistics Japan 380,000
18 GEODIS France 363,451
19 DACHSER Germany 344,900
20 Crane Worldwide Logistics United States 337,300
21 NNR Global Logistics Japan 315,011
22 Hitachi Transport System Japan 300,000
23 FedEx Logistics United States 276,400
24 Pilot Freight Services United States 230,000
25 C.H. Robinson United States 225,000
*Air metric tons are company reported or A&A estimates Sources: Armstrong & Associates, Inc. Who’s Who in Logistics Online 3PL Guide; Company Reports
(6%)
(4%)
(2%)
0%
2%
4%
6%
8%
10%
12%
14%M
ay-1
3
Au
g-1
3
Nov-1
3
Fe
b-1
4
Ma
y-1
4
Au
g-1
4
Nov-1
4
Fe
b-1
5
Ma
y-1
5
Au
g-1
5
Nov-1
5
Fe
b-1
6
Ma
y-1
6
Au
g-1
6
Nov-1
6
Fe
b-1
7
Ma
y-1
7
Au
g-1
7
Nov-1
7
Fe
b-1
8
Ma
y-1
8
Au
g-1
8
Nov-1
8
Fe
b-1
9
Ma
y-1
9
Y/Y
% C
ha
ng
e
Freight Tonne Kilometers
Available Freight Tonne Kilometers
Industry Update
July 22, 2019
18
AIRFREIGHT VOLUMES
The airfreight market saw a period of significant growth throughout 2017 as the global markets recovered from an industrial
malaise in 2015 and early 2016, but, as shown by IATA volumes (see Exhibit 21), market growth has turned negative so far in
2019 and we continue to anticipate contraction and then flattening for the balance of this year. Volumes for U.S.-based carriers
have fared slightly better, but demonstrate a similar pattern (Exhibit 22).
Staying on the topic of the U.S., global semiconductor shipment volumes have historically borne close correlation to trans-Pacific
airfreight shipments. To the extent that freight forwarders are exposed to that lane—Expeditors International is a standout within
the coverage set—their air forwarding volumes will likely be under pressure given the deceleration in semiconductor billings (see
Exhibit 24).
In Exhibit 24, we can observe that most of the large forwarders have seen volume trends mirroring the wider market, and nearly
all dipped into negative growth territory in 1Q19. Given the performance of airfreight volume indicators so far in 2Q19, we
believe tonnage comps for the public players will remain under pressure this year, declining further in 2Q19 before normalizing
in the later part of this year, for a net market outlook in 2019 of 1% contraction to 0% growth.
Exhibit 21: After a period of strong growth, airfreight volumes turned negative at the end of 2018 and
continue to show year-over-year declines in the low-to-mid single-digit range through 2Q19
Source: International Air Transport Association
(6%)
(4%)
(2%)
0%
2%
4%
6%
8%
10%
12%
14%
Ma
y-1
3
Au
g-1
3
Nov-1
3
Fe
b-1
4
Ma
y-1
4
Au
g-1
4
Nov-1
4
Fe
b-1
5
Ma
y-1
5
Au
g-1
5
Nov-1
5
Fe
b-1
6
Ma
y-1
6
Au
g-1
6
Nov-1
6
Fe
b-1
7
Ma
y-1
7
Au
g-1
7
Nov-1
7
Fe
b-1
8
Ma
y-1
8
Au
g-1
8
Nov-1
8
Fe
b-1
9
Ma
y-1
9
IAT
A F
TK
Gro
wth
- Y
/Y%
Cha
ng
e
Industry Update
July 22, 2019
19
Exhibit 22: U.S.-based air cargo volumes show a similar pattern of deceleration
Source: Airlines for America
Exhibit 23: Global semiconductor billings have decelerated meaningfully this year, which has negative implications for airfreight forwarding volumes—particularly on eastbound trans-Pacific routes
Source: Semiconductor Industry Association
(25%)
(20%)
(15%)
(10%)
(5%)
0%
5%
10%
15%
Ma
y-1
2
Nov-1
2
Ma
y-1
3
Nov-1
3
Ma
y-1
4
Nov-1
4
Ma
y-1
5
Nov-1
5
Ma
y-1
6
Nov-1
6
Ma
y-1
7
Nov-1
7
Ma
y-1
8
Nov-1
8
Ma
y-1
9
Y/Y
% C
ha
ng
e -
TT
M U
.S.
Ca
rrie
r C
arg
o R
TM
s Domestic
InternationalAtlanticLatinPacific
(40%)
(30%)
(20%)
(10%)
0%
10%
20%
30%
40%
50%
60%
70%
0
4
8
12
16
20
24
28
32
36
40
44
Ma
y-0
2
Ma
y-0
3
Ma
y-0
4
Ma
y-0
5
Ma
y-0
6
Ma
y-0
7
Ma
y-0
8
Ma
y-0
9
Ma
y-1
0
Ma
y-1
1
Ma
y-1
2
Ma
y-1
3
Ma
y-1
4
Ma
y-1
5
Ma
y-1
6
Ma
y-1
7
Ma
y-1
8
Ma
y-1
9
Glo
ba
l S
em
ico
nd
uc
tor
Bil
lin
gs
Y/Y
% C
ha
ng
e
Glo
ba
l S
em
ico
nd
uc
tor
Bil
lin
gs
(3
-mo
. m
ovin
g a
ve
rag
e $
U.S
., m
illio
ns)
Semiconductor Billings (Shpt Value, 3MMA)
Semiconductor Billings - Y/Y % Change
Industry Update
July 22, 2019
20
Exhibit 24: Freight forwarder tonnage results have and continue to mirror the broader industry trends; volumes will likely remain flattish for the year
Source: Company data, Stifel estimates
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
25%
30%
35%
40%1
Q1
2
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
3Q
16
4Q
16
1Q
17
2Q
17
3Q
17
4Q
17
1Q
18
2Q
18
3Q
18
4Q
18
1Q
19
2Q
19
Air
fre
igh
t T
on
ne
s -
Y/Y
% C
ha
ng
e
Market CEVA
CHRW DHL-GF
DSV EXPD
KNIN PWTN
Industry Update
July 22, 2019
21
AIRFREIGHT PRICING
In Exhibit 25, we take a look at the airfreight pricing environment over the past four years, as measured by the TAC Index
China/Hong Kong-to-Europe trade basket. We can observe that on a year-over-year basis, underlying airfreight capacity pricing
continued to decelerate through 2016 due to a global industrial softening that began in 2015. The declines bottomed in 2Q16-
3Q16 before growth resumed in 2017 from restocking as a global market recovery took hold.
There are certain mix dynamics that individually affect airfreight yields at each of the publicly-listed freight forwarders, including
varying shifts toward lighter, less dense freight like E-commerce and perishables. And there are variations in lane and route
exposure among them as well. But, generally speaking, when we compare yield performance among the public forwarders to
the core TAC Asia-Europe benchmark, we see that as prices rise—especially as they rise rapidly—gross profit per unit of freight
tends to get squeezed, as there is a lag in passing higher capacity costs through to customers. The opposite, of course, is true
as well. In 2H17, Panalpina was an exception to the group yield trend (as was Expeditors on the Asia-U.S. basket), due to a
stated policy of yield selection over volume in a strong demand environment.
Exhibit 25: Among the public forwarders—particularly those with legacy depth on the Asia-Europe
headhaul, Kuehne Nagel has been doing the best job of capitalizing on a softening capacity pricing
market (as represented by the TAC China/HK-Europe Airfreight Pricing Index). Its performance has
been consistent over the past seven quarters, which is indicative of a concerted yield management
approach. On the other side of the spectrum, Panalpina has been struggling to capture yield, even as
capacity pricing has eased, which is indicative of charging too little and/or paying too much, in our
view
Note: Kuehne Nagel results in 1Q19 exclude the impact of the Quick International Couriers acquisition
Source: The Air Freight Index Company, Ltd.; Company data, Stifel estimates
(25%)
(20%)
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Ma
r 1
6
Ma
y 1
6
Jul 16
Se
p 1
6
Nov 1
6
Jan
17
Ma
r 1
7
Ma
y 1
7
Jul 17
Se
p 1
7
Nov 1
7
Jan
18
Ma
r 1
8
Ma
y 1
8
Jul 18
Se
p 1
8
Nov 1
8
Jan
19
Ma
r 1
9
Ma
y 1
9
Jul 19
GP
/To
nn
e v
s.
TA
C P
ric
ing
In
de
x
Y/Y
% C
ha
ng
e
TAC CN/HK-EUR
CHRW
DGFF
DSV
EXPD
KNIN
PWTN
Industry Update
July 22, 2019
22
Through late 2018 and into 2019, global demand has softened, and passenger belly capacity continues to enter the market,
increasing available FTKs and thus pressuring underlying freight rates. Most freight forwarders have been able to capitalize on
this trend and have seen some gross margin tailwind. Provided that air freight demand does not fall too far and impede freight
selection, this yield trend should continue through the balance of the year. The notable exception to the pack—at least as far as
the Europe-based providers, is Panalpina, which suffers from tougher comparisons given its yield gains during 2017-2018’s
stronger market. But we believe it also has not been able to hold on to price outside of a capacity constrained environment (i.e.
no one wants to dance with Panalpina when capacity isn’t scarce).
In terms of the overall strategy and the long-term trend for the other Europe-based forwarders, DHL seems to have taken a more
disciplined market approach, especially after abandoning its NFE (New Forwarding Environment) initiative in late 2015. Exhibit
25 illustrates DGFF’s recovery in airfreight GP per ton, allowing some grace period in the wake of the division’s discarded
turnaround.
Kuehne Nagel and DSV have performed remarkably similarly on an airfreight yield basis over the past four years and have kept
GP per tonne more stable than the rest. This result is interesting when one considers that both Kuehne and DSV have taken a
market-growth-plus strategy, and, as in the case of the former, even committed to market-double growth. However, the result is
probably not that surprising given our view that both Kuehne and DSV have disciplined management teams, class-leading
technology to support better cost and pricing transparency, and strong operational cultures to ensure that information is properly
utilized. Good execution is evident in the long-term chart here, in our view.
Exhibit 26: Like Panalpina, Expeditors has seen yields contract and is having difficulty managing its
buy-sell spread relative to peers
Note: Kuehne Nagel results in 1Q19 exclude the impact of the Quick International Couriers acquisition
Source: The Air Freight Index Company, Ltd.; Company data, Stifel estimates
(20%)
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Ma
r 1
7
Ap
r 17
Ma
y 1
7
Jun
17
Jul 17
Au
g 1
7
Se
p 1
7
Oct
17
Nov 1
7
Dec 1
7
Jan
18
Fe
b 1
8
Ma
r 1
8
Ap
r 18
Ma
y 1
8
Jun
18
Jul 18
Au
g 1
8
Se
p 1
8
Oct
18
Nov 1
8
Dec 1
8
Jan
19
Fe
b 1
9
Ma
r 1
9
Ap
r 19
Ma
y 1
9
Jun
19
Jul 19
GP
/To
nn
e v
s.
TA
C P
ric
ing
In
de
x
Y/Y
% C
ha
ng
e
TAC CN/HK-US
CHRW
DGFF
DSV
EXPD
KNIN
PWTN
Industry Update
July 22, 2019
23
Moving on to Exhibit 26, we see a similar capacity pricing/yield dynamic is true on the China/Hong Kong-U.S. headhaul route,
here represented by the TAC CN/HK-US Index basket. In late 2017, Expeditors took a similar yield-first approach to a strong
market, mirroring Panalpina’s strategy. And it too has suffered from difficult comparisons, but not to the extent that its Basel-
based competitor. C.H. Robinson has seen a lot of change in its freight forwarding division over the past few years, but has
generally done a good job of maintaining steady growth in yields.
Going forward, our outlook for overall market yield is in the low-single-digit range—about 3%-3.5% y/y for 2019. This estimate is
premised on lackluster underlying demand and loosening capacity, although the impact of that dynamic should moderate as the
year wears on. That said, there are at least two important factors that could rapidly shift the market and change the yield
dynamic. The first is a resolution of trade tensions—particularly between the U.S. and China. While the current retail I/S ratio
isn’t particularly low (see Exhibit 27), shippers and retailers who have been trying to work inventories down in the face of
softening consumption may experience a sudden need for restocking, and at least in some cases, underlying airfreight capacity
would likely be squeezed, putting pressure on yields. The other factor that could affect the yield outlook is IMO2020. While we
expect very little freight to move between ocean and air, even if we see significant service disruptions on the water as container
lines slow steaming in an effort to artificially absorb capacity or roll cargo in favor of desperate shippers. That said, it doesn’t
take much shift to move the needle, as we saw with many forwarders during the west coast port strike in 2014-2015.
Exhibit 27: Total retail inventories—while not a direct proxy for goods that move via air—show that
shippers have been working down inventory since the pre-tariff build late last year. While I/S ratios
aren’t exceptionally low, in our view, a sudden need to restock post-trade deal could cause a
temporary surge in airfreight demand, and thus constrain forwarder gross margins.
Source: U.S. Census Bureau
1.40
1.42
1.44
1.46
1.48
1.50
1.52
1.54
500
525
550
575
600
625
650
675
Ma
y-1
5
Au
g-1
5
Nov-1
5
Fe
b-1
6
Ma
y-1
6
Au
g-1
6
Nov-1
6
Fe
b-1
7
Ma
y-1
7
Au
g-1
7
No
v-1
7
Fe
b-1
8
Ma
y-1
8
Au
g-1
8
Nov-1
8
Fe
b-1
9
Ma
y-1
9
I/S
Ra
tio
Re
tail
In
ve
nto
rie
s (
$b
n)
Retail Inventories Inventory/Sales Ratio
May-19 I/S Ratio: 1.46
Pre-Tariff Build
Industry Update
July 22, 2019
24
INVESTMENT CONCLUSIONS & VALUATION ANALYSIS
In 2Q19, the public forwarders are facing an environment of sluggish top line appreciation with a contracting airfreight tonnage
environment and slow ocean freight growth. Given the soft volumes and demand-driven capacity loosening in both air and ocean
modes, capacity pricing has eased, in our view. Thus, forwarders are likely to see modest gross margin expansion, all else
equal. However, with the impending effects of IMO 2020 and assuming container lines are able to pass costs through to
customers, we anticipate a meaningful increase in ocean freight pricing, which will likely compress those margins again
beginning in late 3Q19, and certainly into 4Q19. We believe this risk is not fully reflected in the stocks.
On the margin front, we believe that DSV and Kuehne Nagel have the best opportunity to increase long term EBIT/GP
conversion (see Exhibit 28), as both lead the pack in terms of systems and process efficiency. As disruptive forces, competitive
pressure, and more transparent price discovery put modest pressure on gross margins over the next few years, we believe
process automation via technology will be critical to maintain and even expanding profitability. In addition, the shifts in global
consumption patterns and the rise of e-commerce are causing supply and demand dynamics to change, which will create larger
and more frequent price dislocations, in our view, and require more surgical pricing. Freight forwarders must be better-prepared
to manage capacity and handle volatility faster and more accurately on a greater number of lanes. Many have been turning to
M&A as a means of building lane-level scale and better control buy-rates, as well as to gain exposure to sticky and more
profitable specialty verticals like perishables and pharmaceuticals (see Exhibit 29).
Considering the foregoing, and given that valuations for most of the forwarders are still trading at 10-year mean levels (see
Exhibit 30), we believe the group is fairly valued. The only names we are actively recommending are those that also have
catalysts outside the freight forwarding industry, including C.H. Robinson Worldwide (CHRW, $83.22, Buy) due to its exposure
to the U.S. domestic brokerage market (which we believe has higher secular growth potential) and a more favorable risk/return
profile, as well as DHL (DPW-DE, €29.48, Buy, covered by our colleague David Ross), due to its attractive valuation and self-
help margin improvement initiatives. All else being equal, we prefer the domestic logistics names. In addition to C.H. Robinson,
those include small cap Echo Global Logistics (ECHO, $19.13, Buy) and mid-cap Landstar System (LSTR, $110.77, Buy). In our
view, they have had spot market pressure and a soft outlook priced in already, and then some, and continue to see an
overblown reaction from the disruption thesis stemming from the likes of Uber, Convoy, Amazon, et al. Traditionally, these
names have performed well in late-cycle environments due to receding cost pressures, low risk balance sheets, and good cash
generation, but many continue to trade toward the bottom end of historical valuation ranges.
Industry Update
July 22, 2019
25
Exhibit 28: Among the “haves”, DSV and Kuehne Nagel offer the most potential for further margin improvement, in our view, due to superior systems and processes and greater efforts toward automation.
Source: Company data, Stifel estimates
Exhibit 29: Size matters—large global 3PLs continue to consolidate in an effort to broaden geographic reach, vertical capabilities, and lane-level purchasing scale
Source: Primary, Company Information, Secondary, A&A Estimates EBIT* or EBITDA ** Multiple
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%2
Q0
9
4Q
09
2Q
10
4Q
10
2Q
11
4Q
11
2Q
12
4Q
12
2Q
13
4Q
13
2Q
14
4Q
14
2Q
15
4Q
15
2Q
16
4Q
16
2Q
17
4Q
17
2Q
18
4Q
18
2Q
19
Co
nve
rsio
n R
ati
o (
EB
IT/G
ross P
rofit)
DSV EXPD KNIN DHL CHRW PWTN
Buyer Year Target Purchase Price ($M) Multiple
2018 GlobalTranz Enterprises 400 11**
Stonepeak Partners,
D1 Capital Partners2018 Lineage Logistics 700 7**
2018 DSC Logistics 216 8.1**
York Capital Management 2018 Mode Transportation 238.5 10**
2018 Dicom Canada 276.1 5.9**
Gryphon Investors 2018Transportation Insight (Ridgemont
Equity Partners)50 to 200 10**
2018AFN Logistics (Eve Partners/Hilltop
Holdings/ Latona Partners)140 11.5**
2018 CaseStack 255 11.6**
2018Nolan Transportation Group
(Ridgemont Equity Partners)50 to 200 10**
Industry Update
July 22, 2019
26
Exhibit 29 (Continued): Size matters—large global 3PLs continue to consolidate in an effort to broaden geographic reach, vertical capabilities, and lane-level purchasing scale
Source: Primary, Company Information, Secondary, A&A Estimates EBIT* or EBITDA ** Multiple
Industry Update
July 22, 2019
27
Exhibit 30: For the most part, freight forwarder valuations are tracking in-line with 10-year historical averages. We believe the group is fairly-valued, at present
15x
17x
19x
21x
23x
25x
27x
29x
Jul 09
Oct
09
Jan
10
Ap
r 10
Jul 10
Oct
10
Jan
11
Ap
r 11
Jul 11
Oct
11
Jan
12
Ap
r 12
Jul 12
Oct
12
Jan
13
Ap
r 13
Jul 13
Oct
13
Jan
14
Ap
r 14
Jul 14
Oct
14
Jan
15
Ap
r 15
Jul 15
Oct
15
Jan
16
Ap
r 16
Jul 16
Oct
16
Jan
17
Ap
r 17
Jul 17
Oct
17
Jan
18
Ap
r 18
Jul 18
Oct
18
Jan
19
Ap
r 19
Jul 19
CH
RW
- F
Y2
Pri
ce
-Ea
rnin
gs (
Me
an
)
Stifel Target: 18x
10x
12x
14x
16x
18x
20x
22x
24x
26x
28x
Jul 09
Oct
09
Jan
10
Ap
r 10
Jul 10
Oct
10
Jan
11
Ap
r 11
Jul 11
Oct
11
Jan
12
Ap
r 12
Jul 12
Oct
12
Jan
13
Ap
r 13
Jul 13
Oct
13
Jan
14
Ap
r 14
Jul 14
Oct
14
Jan
15
Ap
r 15
Jul 15
Oct
15
Jan
16
Ap
r 16
Jul 16
Oct
16
Jan
17
Ap
r 17
Jul 17
Oct
17
Jan
18
Ap
r 18
Jul 18
Oct
18
Jan
19
Ap
r 19
Jul 19
DS
V -
FY
2 P
rice
-Ea
rnin
gs (
Me
an
)
Stifel Target: 26x
6x
8x
10x
12x
14x
16x
18x
Jul 09
Oct
09
Jan
10
Ap
r 10
Jul 10
Oct
10
Jan
11
Ap
r 11
Jul 11
Oct
11
Jan
12
Ap
r 12
Jul 12
Oct
12
Jan
13
Ap
r 13
Jul 13
Oct
13
Jan
14
Ap
r 14
Jul 14
Oct
14
Jan
15
Ap
r 15
Jul 15
Oct
15
Jan
16
Ap
r 16
Jul 16
Oct
16
Jan
17
Ap
r 17
Jul 17
Oct
17
Jan
18
Ap
r 18
Jul 18
Oct
18
Jan
19
Ap
r 19
Jul 19
DP
W -
FY
2 P
rice
-Ea
rnin
gs (
Me
an
)
Stifel Target: 13x
Industry Update
July 22, 2019
28
Exhibit 30 (Continued): For the most part, freight forwarder valuations are tracking in-line with 10-year historical averages. We believe the group is fairly-valued, at present
Source: FactSet Research Systems, Inc., Stifel estimates
16x
18x
20x
22x
24x
26x
28x
30x
32xJul 09
Oct
09
Jan
10
Ap
r 10
Jul 10
Oct
10
Jan
11
Ap
r 11
Jul 11
Oct
11
Jan
12
Ap
r 12
Jul 12
Oct
12
Jan
13
Ap
r 13
Jul 13
Oct
13
Jan
14
Ap
r 14
Jul 14
Oct
14
Jan
15
Ap
r 15
Jul 15
Oct
15
Jan
16
Ap
r 16
Jul 16
Oct
16
Jan
17
Ap
r 17
Jul 17
Oct
17
Jan
18
Ap
r 18
Jul 18
Oct
18
Jan
19
Ap
r 19
Jul 19
EX
PD
- F
Y2
Pri
ce
-Ea
rnin
gs (
Me
an
)
Stifel Target: 19.5x
16x
18x
20x
22x
24x
26x
28x
Jul 09
Oct
09
Jan
10
Ap
r 10
Jul 10
Oct
10
Jan
11
Ap
r 11
Jul 11
Oct
11
Jan
12
Ap
r 12
Jul 12
Oct
12
Jan
13
Ap
r 13
Jul 13
Oct
13
Jan
14
Ap
r 14
Jul 14
Oct
14
Jan
15
Ap
r 15
Jul 15
Oct
15
Jan
16
Ap
r 16
Jul 16
Oct
16
Jan
17
Ap
r 17
Jul 17
Oct
17
Jan
18
Ap
r 18
Jul 18
Oct
18
Jan
19
Ap
r 19
Jul 19
KN
IN -
FY
2 P
rice
-Ea
rnin
gs (
Me
an
)
Stifel Target: 20x
10x
15x
20x
25x
30x
35x
40x
45x
Jul 09
Oct
09
Jan
10
Ap
r 10
Jul 10
Oct
10
Jan
11
Ap
r 11
Jul 11
Oct
11
Jan
12
Ap
r 12
Jul 12
Oct
12
Jan
13
Ap
r 13
Jul 13
Oct
13
Jan
14
Ap
r 14
Jul 14
Oct
14
Jan
15
Ap
r 15
Jul 15
Oct
15
Jan
16
Ap
r 16
Jul 16
Oct
16
Jan
17
Ap
r 17
Jul 17
Oct
17
Jan
18
Ap
r 18
Jul 18
Oct
18
Jan
19
Ap
r 19
Jul 19
PW
TN
- F
Y2
Pri
ce
-Ea
rnin
gs (
Me
an
)
Stifel Target: 23.5x
Industry Update
July 22, 2019
29
APPENDIX – FREIGHT FORWARDING OPERATING COMPS
¹ Consolidated company results include businesses besides air & ocean freight forwarding ² DHL Global Forwarding excludes results from Freight ³ Year-over-year growth figures exclude the impact of F/X currency changes 4 CEVA does not report Freight management EBIT; calculations deduct consolidated D&A (assumes 25% allocated to Freight mgmt) from EBITDA
Source: Company data, Stifel estimates
CEVA CHRW ¹ DHL ² DSV EXPD ¹ KNIN PWTN ¹ Average CEVA CHRW DHL ² DSV EXPD ¹ KNIN PWTN ¹ Average
Airfreight
Gross revenue 314$ NA 1,206$ 700$ 715$ 1,174$ 760$ 811$ 338$ NA 1,225$ 694$ 731$ 1,203$ 791$ 830$
% growth 3 (7.1%) NA 3.4% 9.3% (2.2%) 2.5% 0.9% 1.2% 23.1% NA 3.2% 4.4% 18.8% 25.7% 14.2% 14.9%
Gross profit 81$ 26$ 254$ 187$ 206$ 327$ 174$ 179$ 83$ 26$ 264$ 176$ 218$ 298$ 187$ 179$
% growth 3 (2.8%) 0.4% 4.2% 15.5% (5.5%) 15.2% (2.7%) 3.5% 19.0% 27.7% 3.9% 3.1% 26.5% 17.4% 22.9% 17.2%
Gross profit margin (GP/GR) 25.6% NA 18.6% 26.8% 28.8% 27.9% 22.9% 25.1% 24.5% NA 18.5% 25.3% 29.8% 24.8% 23.7% 24.4%
y/y change (bp) 114bp NA 13bp 143bp (100bp) 306bp (84bp) 65bp (84bp) NA 12bp (32bp) 181bp (174bp) 169bp 12bp
Tonnage 99.9 NA 887.0 170.1 NA 409.0 259.9 365.2 107.3 NA 923.0 162.7 NA 422.0 240.5 371.1
Tonnage growth (y/y % Δ) (6.9%) (4.0%) (3.9%) 4.6% (4.0%) (3.1%) 8.1% (1.3%) 1.6% 18.0% (3.0%) 10.3% 5.0% 20.6% 3.1% 7.9%
Implied GP/ton y/y % Δ 4.4% 4.6% 8.4% 10.5% (1.6%) 18.9% (9.9%) 5.0% 17.1% 8.2% 7.1% (6.6%) 20.5% (2.6%) 19.2% 9.0%
Ocean Freight
Gross revenue 276$ NA 890$ 732$ 569$ 1,858$ 583$ 818$ 254$ NA 879$ 694$ 521$ 1,724$ 564$ 773$
% growth 3 8.7% NA 6.4% 14.4% 9.2% 13.3% 8.6% 10.1% 16.9% NA (1.0%) (5.3%) 5.5% 5.8% 8.8% 5.1%
Gross profit 56$ 71$ 177$ 182$ 148$ 383$ 103$ 160$ 52$ 68.7$ 194$ 178$ 141$ 376$ 115$ 161$
% growth 3 7.3% 4.0% (1.3%) 10.6% 4.8% 7.0% (5.5%) 3.9% 8.1% 8.3% (3.1%) (0.3%) 10.8% 5.9% 3.2% 4.7%
Gross profit margin (GP/GR) 20.1% NA 17.6% 24.8% 26.1% 20.6% 17.7% 21.2% 20.4% NA 18.9% 25.7% 27.2% 21.8% 20.4% 22.4%
y/y change (bp) (25bp) NA (136bp) (86bp) (108bp) (121bp) (266bp) (123bp) (166bp) NA (41bp) 128bp 130bp 4bp (110bp) (9bp)
TEUs 192.9 NA 752.0 359.9 NA 1,146.0 348.0 559.8 181.6 NA 766.0 346.8 NA 1,079.0 359.8 546.6
TEU growth (y/y % Δ) 6.2% 0.0% (1.8%) 3.8% 6.0% 6.2% (3.3%) 2.4% 8.5% 11.0% (0.3%) 4.2% 5.0% 5.0% (3.8%) 4.2%
Implied GP/TEU y/y % Δ 1.1% 4.0% 0.6% 6.5% (1.1%) 0.7% (2.3%) 1.4% (0.3%) (2.4%) (2.8%) (4.3%) 5.5% 0.9% 7.3% 0.6%
Freight Forwarding
Gross revenue 797$ 538$ 2,996$ 1,432$ 2,020$ 3,032$ 1,343$ 1,737$ 803$ 554$ 3,113$ 1,388$ 1,854$ 2,927$ 1,355$ 1,713$
% growth 3 (0.7%) (2.9%) 4.1% 11.8% 8.9% 8.9% 4.1% 4.9% 14.4% 18.1% 1.2% (0.7%) 20.0% 13.1% 11.9% 11.2%
Gross profit 218$ 127$ 686$ 369$ 654$ 710$ 277$ 434$ 224$ 123$ 715$ 354$ 636$ 675$ 302$ 433$
% growth 3 (2.7%) 3.4% 3.8% 13.0% 2.9% 10.6% (3.7%) 3.9% 10.3% 15.5% (1.4%) 1.4% 20.5% 10.7% 14.6% 10.2%
Gross profit margin (GP/GR) 27.4% 23.7% 22.9% 25.8% 32.4% 23.4% 20.6% 25.2% 27.9% 22.2% 23.0% 25.5% 34.3% 23.1% 22.3% 25.5%
EBIT 4 8.0$ 14.2$ 93.1$ 151.9$ 187.6$ 192.7$ 25.3$ 96.1$ 6 8.2$ 67.6$ 131.2$ 192.8$ 187.7$ 22.2$ 87.9$
% growth 33.3% 72.8% 49.1% 25.5% (2.7%) 7.9% 19.6% 29.4% NA (49.3%) 96.4% 15.2% 32.0% 7.9% 50.6% 25.5%
Conversion ratio (EBIT/GP) 4 3.7% 11.2% 13.6% 41.2% 28.7% 27.1% 9.1% 19.2% 2.7% 6.7% 9.5% 37.1% 30.3% 27.8% 7.3% 17.3%
y/y change (bp) 99bp 448bp 413bp 411bp (164bp) (69bp) 178bp 188bp NA (853bp) 470bp 445bp 263bp (73bp) 175bp 71bp
1Q19 1Q18
CEVA CHRW ¹ DHL ² DSV EXPD ¹ KNIN PWTN ¹ Average CEVA CHRW DHL ² DSV EXPD ¹ KNIN PWTN ¹ Average
Airfreight
Gross revenue 422$ NA 1,378$ 793$ 906$ 1,277$ 872$ 941$ 429$ NA 1,260$ 774$ 854$ 1,213$ 835$ 894$
% growth 3 (1.6%) NA 10.4% 6.0% 6.0% 6.3% 5.4% 5.4% 29.6% NA 4.0% 8.5% 24.0% 31.7% 13.9% 18.6%
Gross profit 79$ 28$ 305$ 181$ 222$ 308$ 182$ 187$ 81$ 26$ 274$ 165$ 218$ 291$ 186$ 177$
% growth 3 (2.4%) 9.3% 14.6% 13.7% 1.9% 7.0% (1.0%) 6.1% 19.6% 16.7% 11.0% 5.4% 25.9% 16.2% 29.3% 17.7%
Gross profit margin (GP/GR) 18.7% NA 19.5% 22.8% 24.5% 24.1% 20.9% 21.8% 18.9% NA 18.7% 21.3% 25.5% 24.0% 22.3% 21.8%
y/y change (bp) (15bp) NA 72bp 154bp (99bp) 16bp (135bp) (1bp) (159bp) NA 117bp (64bp) 38bp (320bp) 266bp (20bp)
Tonnage 126.5 NA 1,000.0 175.6 NA 441.0 286.7 406.0 129.6 NA 1,037.0 167.7 NA 448.0 273.9 411.2
Tonnage growth (y/y % Δ) (2.4%) (3.0%) (3.6%) 4.7% 2.0% (1.6%) 4.7% 0.1% 10.2% 28.0% 2.3% 10.0% 6.0% 23.8% 8.5% 12.7%
Implied GP/ton y/y % Δ (0.0%) 12.7% 18.8% 8.5% (0.1%) 8.7% (5.4%) 6.2% 8.5% (8.8%) 8.5% (4.2%) 18.8% (6.1%) 19.2% 5.1%
Ocean Freight
Gross revenue 273$ NA 933$ 712$ 615$ 1,887$ 576$ 833$ 248$ NA 901$ 621$ 521$ 1,737$ 517$ 758$
% growth 3 10.2% NA 4.5% 18.6% 18.0% 9.6% 12.3% 12.2% 5.3% NA 4.5% 2.2% 3.6% 15.4% 7.0% 6.3%
Gross profit 46$ 82$ 196$ 171$ 151$ 368$ 115$ 161$ 50$ 73.1$ 194$ 166$ 141$ 368$ 105$ 157$
% growth 3 (7.6%) 12.4% 4.2% 6.5% 7.2% 0.8% 10.0% 4.8% 0.1% 5.5% (8.8%) 0.9% 7.2% 4.3% 5.2% 2.0%
Gross profit margin (GP/GR) 17.0% NA 18.5% 24.1% 24.5% 19.5% 19.9% 20.6% 20.3% NA 18.6% 26.8% 27.0% 21.2% 20.3% 22.4%
y/y change (bp) (327bp) NA (5bp) (273bp) (246bp) (170bp) (42bp) (177bp) (105bp) NA (271bp) (36bp) 91bp (226bp) (36bp) (97bp)
TEUs 205.6 NA 824.0 357.2 NA 1,171.0 363.3 584.2 189.1 NA 820.0 343.2 NA 1,120.0 377.9 570.0
TEU growth (y/y % Δ) 8.7% 7.5% 0.5% 4.1% 10.0% 4.6% (3.9%) 4.5% 6.9% 12.5% 4.7% 4.2% 1.0% 6.9% (2.9%) 4.8%
Implied GP/TEU y/y % Δ (15.0%) 4.5% 3.7% 2.3% (2.5%) (3.6%) 14.4% 0.5% (6.3%) (6.2%) (13.0%) (3.2%) 6.2% (2.4%) 8.3% (2.4%)
Freight Forwarding
Gross revenue 971$ 677$ 3,290$ 1,505$ 2,236$ 3,164$ 1,448$ 1,899$ 939$ 591$ 3,177$ 1,395$ 1,901$ 2,950$ 1,352$ 1,758$
% growth 3 3.4% 14.5% 6.9% 11.6% 17.6% 8.2% 8.0% 10.0% 14.0% 24.2% 5.1% 5.6% 15.8% 21.6% 11.2% 13.9%
Gross profit 229$ 143$ 761$ 352$ 681$ 676$ 297$ 448$ 232$ 128$ 721$ 331$ 629$ 659$ 291$ 427$
% growth 3 (1.3%) 11.6% 9.0% 10.0% 8.2% 3.5% 3.0% 6.3% 7.4% 12.1% 0.3% 3.1% 14.6% 9.2% 19.4% 9.5%
Gross profit margin (GP/GR) 23.6% 21.1% 23.1% 23.4% 30.4% 21.4% 20.5% 23.4% 24.7% 21.6% 22.7% 23.7% 33.1% 22.3% 21.5% 24.2%
EBIT 4 NA 29.8$ 148.4$ 137.2$ 217.0$ 178.8$ 31.8$ 123.8$ NA 16.8$ 91.8$ 124.8$ 199.0$ 194.6$ 31.8$ 109.8$
% growth NA 76.9% 66.7% 13.7% 9.0% (7.3%) 0.9% 26.7% NA (31.6%) 9.9% 38.7% 15.6% 4.9% 99.3% 22.8%
Conversion ratio (EBIT/GP) 4 NA 20.9% 19.5% 39.0% 31.9% 26.4% 10.7% 24.7% NA 13.2% 12.7% 37.7% 31.6% 29.5% 10.9% 22.6%
y/y change (bp) NA 770bp 675bp 125bp 23bp (309bp) (21bp) 210bp NA (842bp) 111bp 969bp 26bp (122bp) 437bp 96bp
4Q18 4Q17
Industry Update
July 22, 2019
30
(figures in $US millions, except per share amounts and where otherwise noted)
Closing
Price Diluted Market Total Cash & Book TTM 2019E TTM TTM TTM TTM TTM TTM PEG Div. 2019E
Company name (Ticker) Rating 7/22/2019 S/O cap. Debt equiv. TEV (a)
2018A(b)
2019E(b)
2020E(b)
value Revenue EBITDA EBITDA EBITDAR (c)
EBIT ROA ROE ROIC ratio(d)
Yield FCF Yld
Non-Asset-Based Forwarding / Logistics
BEST Inc. (BEST) Buy 4.96 403.8 2,003.0 269.5 246.4 2,026.1 NM NM 30.9x 3.2x 0.5x 3.5x NM NM NM (4.6%) (12.5%) (8.8%) NM 0.0% 4.2%
C.H. Robinson Worldwide (CHRW) Buy 83.22 137.4 11,433.6 1,341.6 445.5 12,329.7 17.6x 16.5x 15.9x 6.9x 4.5x 11.3x 11.9x 11.6x 13.0x 15.2% 43.6% 24.2% 1.7 2.4% 0.0%
DSV A/S (DSV-DK) Hold DKK 631.60 185.0 17,563.5 2,997.5 192.0 20,369.0 28.6x 27.0x 25.2x 7.3x 6.3x 19.7x 17.6x 2.1x 20.2x 10.5% 31.6% 17.3% 1.8 0.4% 3.7%
Echo Global Logistics (ECHO) Buy 19.13 27.8 532.5 177.3 37.6 672.2 10.2x 10.6x 9.8x 1.4x 1.6x 6.5x 5.9x 6.4x 8.9x 5.9% 13.8% 10.5% 0.6 0.0% 3.9%
Expeditors International (EXPD) Hold 74.67 172.0 12,842.9 0.0 1,189.4 11,685.4 22.0x 21.5x 20.1x 6.0x 4.4x 14.0x 13.8x 13.2x 14.8x 18.2% 30.3% 29.5% 2.1 1.2% 4.0%
Forward Air Corp. (FWRD) Hold 59.70 28.8 1,721.1 91.4 42.2 1,770.4 19.1x 18.4x 16.4x 3.1x 1.3x 9.7x 10.7x 9.2x 14.4x 11.7% 17.1% 15.5% 1.7 1.2% 7.4%
Hub Group (HUBG) Buy 40.25 33.6 1,352.6 303.5 267.5 1,388.6 15.4x 12.2x 11.1x 1.5x 0.3x 3.5x 6.7x 6.4x 10.6x 5.2% 11.1% 8.7% 0.9 0.0% 7.3%
Kuehne + Nagel International AG (KNIN-CH) Hold CHF 145.00 120.0 17,400.0 503.9 672.5 17,276.8 22.6x 22.4x 19.6x 6.7x 2.2x 10.3x 12.9x 12.4x 17.2x 8.5% 30.2% 27.6% 2.2 4.1% 5.8%
Landstar System (LSTR) Buy 110.77 40.2 4,453.2 157.9 264.6 4,347.2 17.9x 17.2x 16.2x 6.1x 6.5x 11.2x 11.4x 11.4x 12.9x 19.5% 36.4% 30.3% 1.4 0.6% 6.9%
Panalpina Welttransport Holding (PWTN-CH) Sell CHF 218.60 23.7 5,180.8 448.6 328.5 5,432.7 NM NM NM 8.5x 3.6x 18.1x 19.1x 17.4x NM 3.5% 12.9% 8.3% NM 1.7% 2.4%
Universal Logistics Holdings, Inc. (ULH) Hold 21.41 28.4 607.6 406.2 15.1 998.7 10.5x 8.5x 7.6x 2.9x 2.8x 6.9x 6.9x 5.4x 11.0x 7.9% 30.5% 13.3% 0.4 2.0% 8.4%
XPO Logistics, Inc. (XPO) Buy 62.53 130.6 8,168.0 4,269.0 502.0 12,434.5 19.1x 16.1x 13.8x 2.1x 1.5x 7.5x 7.9x 6.9x 16.5x 3.6% 11.1% 7.1% 0.5 0.0% 24.9%
ZTO Express Inc. (ZTO-US) NC 19.70 727.6 14,334.6 101.6 1,725.6 12,710.6 NA NA NA 4.9x 8.2x NA 26.9x 19.0x 29.8x 11.8% 14.5% 13.9% NM 0.0% NA
Min 532.5 0.0 15.1 672.2 10.2x 8.5x 7.6x 1.4x 0.3x 3.5x 5.9x 2.1x 8.9x (4.6%) (12.5%) (8.8%) 0.4 0.0% 0.0%
Mean 7,507.2 851.4 456.1 7,957.1 18.3x 17.0x 17.0x 4.7x 3.4x 10.2x 12.6x 10.1x 15.4x 9.0% 20.8% 15.2% 1.4 1.0% 6.6%
Median 5,180.8 303.5 267.5 5,432.7 18.5x 16.9x 16.2x 4.9x 2.8x 10.0x 11.7x 10.3x 14.4x 8.5% 17.1% 13.9% 1.6 0.6% 5.0%
Max 17,563.5 4,269.0 1,725.6 20,369.0 28.6x 27.0x 30.9x 8.5x 8.2x 19.7x 26.9x 19.0x 29.8x 19.5% 43.6% 30.3% 2.2 4.1% 24.9%
Stifel Transportation Average 12,529.3 3,183.2 500.6 15,309.3 14.8x 14.6x 14.0x 3.5x 2.5x 8.2x 10.3x 8.8x 14.0x 7.2% 20.2% 12.3% 1.2 1.3% 7.0%
Excludes non-recurring items; Calculations may vary due to rounding
(a) Total Enterprise Value = Market Capitalization of Equity + Total Debt - Cash + Market Value of Minority Interest
(b) Stifel estimates for those rated and Street consenus estimates for Suspended and Not Covered securities
(c) Enterprise value adjusted to include the capitalization of off balance sheet operating leases with lease expense (or rent expense) being added back to EBITDA for the valuation multiple calculation
(d) 2017E P/E divided by First Call mean or Stifel estimated long-term growth rate
Note: BEST and HUBG are covered by our colleague Dave Ross; ZTO-US is not covered
Source: Company data, FactSet Research Systems, First Call, and Stifel estimates
Earnings per Share
Comparative Valuation Matrix - Transportation & Logistics
Equity value as a multiple of Enterprise value as a multiple of
Industry Update
July 22, 2019
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Industry Update
July 22, 2019
32
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Industry Update
July 22, 2019
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