J. Bruce Chan | (786) 257-2411 | [email protected]Stifel 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: 2Q19 Freight Forwarding Preview Summary The current freight forwarding environment is soft. But as is the nature of freight intermediary business models, most forwarders have been able to compensate with 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 gross margin 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 on a 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 modal impact is most acute in ocean freight forwarding due to volume loss. But customs brokerage and 3PL/supply chain planning operations tend to benefit as shippers 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, production capacity, distance from intermediate suppliers, proximity to raw material locations, and lack of logistics infrastructure. Sourcing shifts may add lead time and thus 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 come with 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 of passing costs through, but given the scale involved here, we believe there is no alternative. Those touched by the first derivative impacts have been planning appropriately, 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 become more surgical with their supply chains. Also, freight forwarders are looking to niche specialization to drive high-margin value-added services. Competitive pressure continues to form around the fringes of the industry a la container lines expanding into broader logistics functions. And, finally, while the digital disruption threat has matured and mellowed, the need to innovate and invest significantly in technology is strong as ever. We believe these trends will drive a 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-shipping activity, which was evident in North American container import volumes (see Exhibit 9). To the extent that freight forwarders like Expeditors have avoided volume cooling due to exposure to this lane, we expect that boost to go away in 2Q19. In 2019, we expect global ocean forwarding market volumes to 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, IMO 2020 could take capacity rates up significantly as early as 3Q19, which would squeeze forwarder gross margins, all else equal. Our outlook for 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 of trade tensions, we may see a short-term need for sudden inventory replenishment that could drive market volumes beyond our current 2019 forecast of (1%)-0% y/y growth. • Airfreight forwarding yields (GP/ton), though, should generally remain favorable, helped by balanced-to-soft underlying capacity pricing. We anticipate ~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 looming geopolitical 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 subject to those pressures and risks from the pending merger with Panalpina, hence our move to the sidelines. All else being equal, we prefer the domestic logistics names 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. Robinson Worldwide, 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 that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
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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
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
(10%)
(5%)
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10%
15%
20%
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2
Au
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Nov-1
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Nov-1
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Fe
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Ma
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8
Nov-1
8
Fe
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9
Ma
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9
Glo
ba
l D
ry &
Ree
fer
TE
Us
Y/Y
% C
hg
(10%)
(5%)
0%
5%
10%
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
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Oct-
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Nov-1
7
Dec-1
7
Jan
-18
Fe
b-1
8
Ma
r-1
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Ap
r-18
Ma
y-1
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Jul-
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Au
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8
Se
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8
Oct-
18
Nov-1
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Dec-1
8
Jan
-19
Fe
b-1
9
Ma
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9
Ap
r-19
Ma
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No
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Am
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Cha
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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
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4Q
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1Q
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2Q
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3Q
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4Q
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1Q
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2Q
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4Q
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2Q
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3Q
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4Q
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1Q
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2Q
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3Q
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4Q
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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
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4Q
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1Q
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2Q
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3Q
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4Q
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16
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4Q
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19
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Oc
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n F
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- Y
/Y %
Ch
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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
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Y/Y
% C
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ina
/ E
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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%)
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0%
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($1,000)
($500)
$0
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$1,000
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$2,000
$2,500
$3,000Jan
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b 1
8
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r 18
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p 1
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Jun
19
Y/Y
% C
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ina
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st
Co
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(75%)
(50%)
(25%)
0%
25%
50%
75%
100%
125%
150%
Jan
18
Fe
b 1
8
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r 1
8
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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
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to E
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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
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
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
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**
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
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
Equity value as a multiple of Enterprise value as a multiple of
Industry Update
July 22, 2019
31
Important Disclosures and CertificationsI, J. Bruce Chan, certify that the views expressed in this research report accurately reflect my personal views about the subjectsecurities or issuers; and I, J. Bruce Chan, certify that no part of my compensation was, is, or will be directly or indirectlyrelated to the specific recommendations or views contained in this research report. Our European Policy for Managing ResearchConflicts of Interest is available at www.stifel.com/institutional/ImportantDisclosures.For applicable current disclosures for all covered companies please visit the Research Page at www.stifel.com or write to the Stifel ResearchDepartment at the following address.US ResearchStifel Research DepartmentStifel, Nicolaus & Company, Inc.One South Street16th FloorBaltimore, MD 21202The equity research analyst(s) responsible for the preparation of this report receive(s) compensation based on various factors, includingStifel's overall revenue, which includes investment banking revenue.Our investment rating system is three tiered, defined as follows:
BUY -We expect a total return of greater than 10% over the next 12 months with total return equal to the percentage price change plusdividend yield.
HOLD -We expect a total return between -5% and 10% over the next 12 months with total return equal to the percentage price changeplus dividend yield.
SELL -We expect a total return below -5% over the next 12 months with total return equal to the percentage price change plus dividend yield.
Occasionally, we use the ancillary rating of SUSPENDED (SU) to indicate a long-term suspension in rating and/or target price, and/orcoverage due to applicable regulations or Stifel policies. SUSPENDED indicates the analyst is unable to determine a "reasonable basis"for rating/target price or estimates due to lack of publicly available information or the inability to quantify the publicly available informationprovided by the company and it is unknown when the outlook will be clarified. SUSPENDED may also be used when an analyst has leftthe firm.
Of the securities we rate, 52% are rated Buy, 36% are rated Hold, 2% are rated Sell and 10% are rated Suspended.
Within the last 12 months, Stifel or an affiliate has provided investment banking services for 18%, 8%, 0% and 3% of the companieswhose shares are rated Buy, Hold, Sell and Suspended, respectively.
Additional Disclosures
Please visit the Research Page at www.stifel.com for the current research disclosures and respective target price methodology applicableto the companies mentioned in this publication that are within Stifel's coverage universe. For a discussion of risks to target price please seeour stand-alone company reports and notes for all stocks.
The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a completesummary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed aresubject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individualinvestors. Employees of Stifel, or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies thatdiffer from the opinions expressed within. Past performance should not and cannot be viewed as an indicator of future performance.
As a multi-disciplined financial services firm, Stifel regularly seeks investment banking assignments and compensation from issuers forservices including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as aplacement agent in private transactions.
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"Stifel", includes Stifel Nicolaus & Company ("SNC"), a US broker-dealer registered with the United States Securities and ExchangeCommission and the Financial Industry National Regulatory Authority and Stifel Nicolaus Europe Limited ("SNEL"), which is authorized andregulated by the Financial Conduct Authority ("FCA"), (FRN 190412) and is a member of the London Stock Exchange.
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UK and European Economic Area (EEA): This report is distributed in the EEA by SNEL, which is authorized and regulated in the UnitedKingdom by the FCA. In these instances, SNEL accepts responsibility for the content. Research produced by SNEL is not intended for useby and should not be made available to non-professional clients.
The complete preceding 12-month recommendations history related to recommendation(s) in this research report is available at https://stifel2.bluematrix.com/sellside/MAR.action
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Canadian Distribution: Research produced by SNEL is distributed in Canada by SNC in reliance on the international dealer exemption.This material is intended for use only by professional or institutional investors. None of the investments or investment services mentioned ordescribed herein is available to other persons or to anyone in Canada who is not a "permitted client" as defined under applicable Canadiansecurities law.
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The recommendation contained in this report was produced at 22 July 2019 23:36EDT and disseminated at 22 July 2019 23:36EDT.Additional Information Is Available Upon Request