Investors in freight forwarder UTi Worldwide (Nasdaq:UTIW) certainly had little reason to be optimistic going into second quarter earnings. With ocean freight rates pressuring margins and air cargo demand falling, earnings expectations had been drifting lower for weeks. Then when FedEx (NYSE:FDX) warned of a disappointing quarter it was not hard to think that investors were bracing themselves for this report.
Consequently, when UTi Worldwide reported a quarter that wasn't all that terrible on Thursday, the stock enjoyed a good pop. Although the stock remains undervalued on a long-term basis, it's going to take real improvement in the underlying markets (and not just relief rallies) for this stock to work.
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Second Quarter Results Still Showing Pressure
To be sure, this wasn't a great quarter for this freight forwarder. Revenue fell 11%, with net revenue down more than 8%. Even the adjusted numbers aren't really strong, with organic revenue down more than 3% and organic net revenue up less than 1%.
Airfreight remains quite weak, as revenue dropped 20% on an 11% drop in tonnage. Although ocean freight performance was less bad, a 5% revenue decline on a 2.5% increase in TEUs is not quite my idea of "robust."
Profits continue to come under pressure. Whether investors choose to follow GAAP operating income (down 17%) or non-GAAP adjusted operating income (down 19%), profits are struggling in the freight forwarding business as air volumes are down and ocean rates are up. Adjusted profits were higher (up almost 3%) in the contract logistics and distribution business, though, so at least there's that.
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Air Cargo Recovery Looking Weaker?
Management didn't have too many encouraging things to say about the air cargo market. Although seeing some slight sequential improvement in volumes and acknowledging the possibility of a spike in rates in the fall tied to tech launches like the new iPhone, management said they saw no sign of a "peak season" this year in airfreight.
If this is true, then that's bad news for rival forwarder Expeditors International (Nasdaq:EXPD), as well as cargo companies such as Atlas Air (Nasdaq:AAWW) and Air Transport Services (Nasdaq:ATSG). For what it's worth, though, neither company traded down markedly after UTIW's conference call and there have been some signs of progress in the industry (including cargo data from PACTL). Keep in mind, what's good/bad for UTi Worldwide is not necessarily the same as for the cargo companies - capacity is starting to leave the air cargo industry and that should be good for rates (which hurt net revenues at UTIW).
Can Ocean Fill the Gap?
While air cargo has been weak, ocean freight spot rates jumped about 36% relative to 2011's second quarter. However, trade flows are still weak and forwards like UTi, Expeditors and Kuehne + Nagel are struggling to pass those higher rates on to customers. Frankly, the only companies that seem to really be profiting off ocean traffic are the container lessors like SeaCube (NYSE:BOX) and TAL International (NYSE:TAL).
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The Bottom Line
The story on UTi remains what it has been for some time - can the company close the gap with Expeditors in terms of margins and returns, while reaping the benefits from the ongoing growth in international trade? While the current poor state of east-west trade is a concern, this will almost certainly improve in time (unless you believe the world's in for an extended stretch of economic malaise). What is less certain is whether the company can improve its margins and cash flow such that the apparent value in the shares becomes real value to shareholders.
I'm still cautiously optimistic on that score. I was not so fond of these shares back in May, preferring domestic less-than-truckload carrier Old Dominion (Nasdaq:ODFL) as a better transportation play. Old Dominion didn't do great over that stretch, but it did outperform UTi Worldwide shares by more than 20%. I'd still be hesitant to buy into the UTi story (and stock) today, but it's getting closer to the right time and I do see definite potential in these shares at today's price.
At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.