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Insurance Firms, Expeditors (EXPD) are not bargain buys

Tuesday, August 12th, 2014

I continue to see TV commercials by insurance companies about how safe their annuities are.

They also talk about how they have this guaranteed high interest rate that can only go up, never down. They also compare it with the stock market and say how the stock market goes up, down and then down again.

It leaves the impression that you will definitely lose money in the stock market because it falls. This isn’t correct; I always talk about how the right side of the stock market chart is higher than the left side.

The stock market has provided one of the best long-term returns. It is not the stock market that performs poorly, it is the people who buy and sell based on emotions and receive a terrible investment return who perform poorly. It is not the stock market’s fault that people sell when they should buy and buy when they should sell.

Unfortunately, insurance companies take advantage of people’s emotions, leading them to believe that the stock market is a losing game and that they should invest in annuities for a guaranteed interest rate.

What people do not understand is that these insurance companies invest in stocks, bonds and real estate. Also, many of these insurance companies have much of their investments in bonds. The problem is that when interest rates go up, bonds go down. If people start cashing in their annuities, the insurance companies will have to sell their bonds at losses and won’t be able to guarantee that higher interest rate.

It is just a shame that insurance companies take advantage of investors’ emotions, persuading them to sell their stocks and invest in annuities so the broker can make a large commission -- sometimes as high as 7 to 10 percent.

Also investors’ money is locked in to this annuity for many years. I have seen lock-in periods for as long as 18 years. So when you see on TV these ads talking about the stock market going down and some insurance company guaranteeing a high interest rate on their annuities, just stop and think: How can it guarantee that interest rate when a current 10-year treasury is paying only around 2.5 percent? How can an insurance company guarantee interest rates north of 4 to 6 percent?

I received a thumbs up on last week’s column about 3-D printers from Auturo, who requested I take a look at a company called Expeditors International of Washington Inc. (Nasdaq: EXPD). The company is based in Seattle and provides services in air and ocean freight consolidation and forwarding, customs clearance, warehousing and distribution, purchase order management and vendor consolidation along with other services related to logistics solutions.

The stock currently trades about $40 per share and has a 52-week high of $46.90 and a 52-week low of $38.42. The market cap of this company is $7.9 billion; the current dividend yield is 1.4 percent.

The current price-to-earnings ratio for the company is 23.4 -- slightly higher than the industry at 19.6. Price to sales is also higher for the company at 1.3 compared with the industry average at 0.4.

Price to book value is 4.0 compared to the airfreight and logistics industry that currently shows no material, or there is no book value on average for the industry. Price to cash flow is 19.5 -- far greater than the industry average of 11.6.

Sales for the company appear anemic at 2.8 percent year over year for the last 12 months compared with the industry.

Earnings per share year over year for the last 12 months were up 7.3 percent for the company, well below a -- strange -- number for the industry of 1,900 percent growth.

The balance sheet for Expeditors looks very strong with a current ratio of 2.63 times the industry average of 0.80. I was also happy to see the debt to equity for the company is zero in a high-debt industry with a debt to equity of 77.7.

Also favoring the company is return on equity at 17.3, far greater than the 9.3 with the industry average. Net profit margin is 5.7 percent for the company, which looks very good when compared to the industry average at 2.3 percent.

I was disappointed to see on the efficiency of the receivable turnover for the company at 6.0 times over the last 12 months, which was well under the industry average of 11.4 times. This could be a concern if receivables are growing faster than sales; investors could see write-offs on some of these receivables as they may become uncollectible.

The company is rather expensive based on a forward PE of 19.3 times. The mean estimate by 19 analysts going out to December 2015 is $2.09 with a stock price about $40 a share. This tells investors they are paying more than 19 times forward earnings for this company.

The company has missed its earnings estimates three out of the last four quarters. The company has a peg ratio of 2.64 -- again demonstrating that at current prices, this company is not a bargain buy.


Do you have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com!

Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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