With a market capitalization of $7.3 billion and a valuation that seems "expensive", Expeditors is not a company that typically comes up when thinking about potential Berkshire acquisitions. However, I think that many of us have been surprised over the years regarding the kind of prices Warren Buffett is sometimes willing to pay for companies if he believes that there is a sustainable moat in place. Expeditors provides logistics services on a global basis which sounds like an asset heavy business but is actually the opposite. Expeditors essentially contracts with air and sea carriers in bulk and then resells capacity to customers at a price that is better than customers could obtain on their own while still leaving Expeditors with attractive margins. I was looking at the company again today because shares have been dropping in recent days and it occurred to me that the free cash flow generation and asset light nature of the business could appeal to Buffett. Historically the company has been managed very conservatively with far more cash on the balance sheet than required to run the business. I estimate that of the $1,261 million cash on the balance sheet, no more than $160-$170 million is really needed to run the business. With that level of cash, the current ratio would still be a conservative 1.5x or a bit higher. Expeditors, unlike almost all companies I read about, reserves for full US taxes on worldwide income so none of this cash is "trapped" overseas. I view $1.1 billion of the cash as excess liquidity not needed to run the business. Backing out the cash of around $5.30/share, EXPD really sells for about $30. On a trailing P/E basis, that's still pushing 20x earnings but isn't necessarily that outlandish given the growth potential and historical cash generation capability. Housed within Berkshire, all of the excess capital generated by the business could be reallocated into other businesses with attractive return potential rather than pile up on the balance sheet. And the rationale for piling up cash on the balance sheet (extreme risk aversion by EXPD management) would not be a factor since under Berkshire the company would not be cash starved in bad times. Anyway, I thought that this was an interesting situation and something that could be a "under the radar" type of target. If EXPD has $1.85 billion in net revenues in 2013 and a 30% operating margin (historically supportable assumptions), operating income would be around $575 million. Apply a 12x multiple and you get $6.9 billion for the business. Add excess cash of $1.1 billion and total value is around $8 billion or around $39/share. Buffett has been willing to pay 10-12x pre-tax multiples in the past. As an aside, EXPD's CEO fits into the mold of Berkshire CEOs. Check out any of the 8-Ks for examples of how they approach the business.
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