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UTi Seems To Be Pricing In The Bad News
As investors increasingly fret about the health of the global economy and the likelihood of another recession, the transports have started to flash some warning signs. Railroad companies like Union Pacific (NYSE:UNP) and CSX (NYSE:CSX) have seen carload traffic slow, while drybulk and container shipping companies see rates carve out new bottoms.
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Curiously, the stocks of asset-heavy companies like rails and air freight have held up better than many of the asset-light logistics and freight-forwarding companies. That seems to be particularly true for UTi Worldwide (Nasdaq:UTIW). While margins and competition have long been a bear story for this supply chain service provider, investors may wonder if the stock's relatively poor performance within the transports is a sign of bad news to come or an opportunity for a relative value call.
Second Quarter Results Not So Bad
For the fiscal second quarter, UTi reported that gross revenue climbed 13% (ahead of the average estimate), while net revenue rose 17% as reported and a bit more than 8% on an organic, constant currency basis. Growth was lead by the small customs brokerage business (up 31%) but the company's two largest businesses - contract logistics and airfreight forwarding - were up 16% and 20%, respectively, even though airfreight and oceanfreight volumes were not especially robust.
Profitability improved nicely; adjusted operating expenses rose a little more than 7% and the company posted 27% growth in reported operating income and a nearly one point improvement in margin. It has to be said, though, that even with improvement UTi's margins and returns on capital still trail those of Expeditors International (Nasdaq:EXPD). (For related reading, see Understanding The Income Statement.)
The Elephant in the Room
The health of international trade and global growth goes a long way toward explaining how well UTi will fare in any given period. To that end, there have been some worrying signs of late. Demand for airfreight and oceanfreight seems to be soft (or at least precarious) and if consumers in the United States and Western Europe cut back much further, that has to have an impact on shipping volumes. The job market doesn't seem to be getting a whole lot better in the United States and flat wages and declining consumer confidence just don't paint a great picture for demand.
However, the United States is not the end-all be-all of international trade. Emerging markets are still doing well and consumer power is growing in those countries. For companies with international footprints - FedEx (NYSE:FDX), UPS (NYSE:UPS), UTi, Expeditors and C.H. Robinson (Nasdaq:CHRW) (which is building one) - that's a welcome bit of news. (For related reading, see What Is An Emerging Market Economy?)
The Bottom Line
Assuming that international trade doesn't do a Wile E Coyote-style drop off a cliff, UTIW shares are probably too cheap right now. Yes, the company still has wood to chop - a plan seems to be in place for improving margins and returns on capital, but performance there is not yet at a satisfactory level. Likewise, the company has to deal with more and more competition entering the global logistics space, not just from well-established names like UPS, but also emerging market players.
If the market's confidence in the economy keeps falling, so too likely will this stock. But when it comes to economic growth, what goes down has almost always gone up again and UTIW could be a good stock to play that eventual recovery.
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Curiously, the stocks of asset-heavy companies like rails and air freight have held up better than many of the asset-light logistics and freight-forwarding companies. That seems to be particularly true for UTi Worldwide (Nasdaq:UTIW). While margins and competition have long been a bear story for this supply chain service provider, investors may wonder if the stock's relatively poor performance within the transports is a sign of bad news to come or an opportunity for a relative value call.
Second Quarter Results Not So Bad
For the fiscal second quarter, UTi reported that gross revenue climbed 13% (ahead of the average estimate), while net revenue rose 17% as reported and a bit more than 8% on an organic, constant currency basis. Growth was lead by the small customs brokerage business (up 31%) but the company's two largest businesses - contract logistics and airfreight forwarding - were up 16% and 20%, respectively, even though airfreight and oceanfreight volumes were not especially robust.
Profitability improved nicely; adjusted operating expenses rose a little more than 7% and the company posted 27% growth in reported operating income and a nearly one point improvement in margin. It has to be said, though, that even with improvement UTi's margins and returns on capital still trail those of Expeditors International (Nasdaq:EXPD). (For related reading, see Understanding The Income Statement.)
The health of international trade and global growth goes a long way toward explaining how well UTi will fare in any given period. To that end, there have been some worrying signs of late. Demand for airfreight and oceanfreight seems to be soft (or at least precarious) and if consumers in the United States and Western Europe cut back much further, that has to have an impact on shipping volumes. The job market doesn't seem to be getting a whole lot better in the United States and flat wages and declining consumer confidence just don't paint a great picture for demand.
However, the United States is not the end-all be-all of international trade. Emerging markets are still doing well and consumer power is growing in those countries. For companies with international footprints - FedEx (NYSE:FDX), UPS (NYSE:UPS), UTi, Expeditors and C.H. Robinson (Nasdaq:CHRW) (which is building one) - that's a welcome bit of news. (For related reading, see What Is An Emerging Market Economy?)
The Bottom Line
Assuming that international trade doesn't do a Wile E Coyote-style drop off a cliff, UTIW shares are probably too cheap right now. Yes, the company still has wood to chop - a plan seems to be in place for improving margins and returns on capital, but performance there is not yet at a satisfactory level. Likewise, the company has to deal with more and more competition entering the global logistics space, not just from well-established names like UPS, but also emerging market players.
If the market's confidence in the economy keeps falling, so too likely will this stock. But when it comes to economic growth, what goes down has almost always gone up again and UTIW could be a good stock to play that eventual recovery.
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by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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