UTIW Suffering Along With The Rest Of Logistics

By Stephen D. Simpson, CFA | June 12, 2012 AAA

These aren't great days in international logistics. Airfreight companies like Atlas Air (Nasdaq:AAWW) and Air Transport (Nasdaq:ATSG) aren't having the easiest time of it, and data from the likes of IATA, HACTL and Cathay Pacific haven't been great either. Conditions on the sea are marginally better, but the economic conditions in Europe, China and (increasingly) other emerging markets are taking its toll on international traffic.

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Against that backdrop and weak numbers from fellow forwarder Expeditors International (Nasdaq:EXPD), UTi Worldwide's (Nasdaq:UTIW) miss is not entirely surprising. While the company is showing some definite margin benefits from its restructuring efforts and revenue wasn't that bad net of FX movements, these numbers still aren't going to help the stock, those of other companies like FedEx (NYSE:FDX) or UPS (NYSE:UPS) nor sentiment on the global economy.

Better Margins, but Turbulence in Airfreight
Reported revenue dropped over 4% this quarter, with net revenue down about 1%. On an organic basis, net revenue actually rose more than 3%. Airfreight was the biggest anchor on results, as reported revenue declined 13% on a 14% drop in tonnage. Ocean revenue ticked up slightly (up 1%) on a small increase in volume, while contract logistics also squeaked out some growth. All in all, reported freight forward revenue declined about 8%, while contract revenue rose almost 2%.

UTi's margin picture is a little more complicated due to various adjustments, but there was still some pretty clear margin improvement. On an adjusted basis, operating income rose about 7%, with adjusted margins improving about half a point. While adjusted income from freight forwarding dropped 13%, profits in the contract business improved nicely (up 30%).

SEE: Financial Statements: Revenue

Little Choice but to Improve Efficiency and Wait for the Turn
UTi has the same basic problem as other transport service providers like FedEx or the railroads - while there is some room to grab share with pricing and expansion into new territories, there's not much they can do to stimulate underlying demand. Consequently, there's not a lot for investors to do but wait and hope that global trade activity improves and takes airfreight along for the ride.

In the meantime, the company appears to be making real progress with its operating efficiency. Due in part to its build-by-acquisitions philosophy, UTi has long lagged expeditors in terms of margins and returns on capital.

Among other restructuring efforts, management is revamping its software with an eye towards integrating disparate global forwarding operation systems. This is going to be a multi-year process, but the company could be setting itself up for strong double-digit cash flow growth in the years to come as the benefits drop through the income statement.

SEE: Understanding The Income Statement

The Bottom Line
Investors looking for solid transport names right now should probably consider ideas like Old Dominion (Nasdaq:ODFL) or Hub Group (Nasdaq:HUBG), as they don't have quite the same global risks that UTi does. By the same token, though, neither of those stocks are exactly cheap and both are seeing domestic rivals bring on a lot of capacity.

With UTi, it's about waiting for another recovery in global trade (especially airfreight) and hoping that the company's margin-boosting initiatives bear fruit. The good news is that short of another global recession, the valuation is not very demanding today and there's meaningful upside relative to names like FedEx or UPS.

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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