Predicting Friday’s Pick by a Newsletter of “one of the truly great businesses”

Dan Ferris says, "If I could only own one business for the rest of my life, this might be it."

By Travis Johnson, Stock Gumshoe, September 5, 2012

It’s probably no surprise that the Stansberry & Associates newsletters probably get more attention from Stock Gumshoe than most of the others — they’re right up there with the Motley Fool when it comes to the size of their mailing lists and the response from our readers to their promos, so everything they do and everything they push tends to float to the top of our our “to do” list … if for no other reason than that more Gumshoe readers are asking about these promos than any others.

So today we’re looking at another teaser from the Stansberry folks — but this time it’s a bit different. Dan Ferris runs the Extreme Value newsletter for Stansberry, which is, as you’ve probably guessed, a value-focused letter, and he often has picked stocks I’ve liked in the past … and this week, in letters to current Stansberry subscribers, he’s been teasing his next pick without the high-hype video “presentation” that we usually get.

He makes the point that he’s been reluctant to add new picks to the Extreme Value portfolio because his standards are so stringent — he says he’s only recommended two new stocks in this newsletter all year. And that he’s got a new one to recommend to his readers in the issue that will come out on Friday.

And then, of course, he throws out enough clues to tantalize us just a wee bit, and to get folks interested in signing up for a subscription to his $1,000 letter. So since even his own subscribers don’t know what the pick is yet, we can try to really challenge the Thinkolator and see if we can predict what his pick will be … let it never be said that your friendly neighborhood Gumshoe turned down a challenge!

Here are the clues we get in Ferris’ note, which follows a brief musing about the importance of “intangible” assets, using the example of Apple and essentially (though not in so many words) making the point that powerful companies with staying power have powerful market position, brands, loyal customers and other irreplaceable assets, even if those assets aren’t necessarily things that could be easily quantified or broken up or melted down:

“… the most valuable type of asset – and the best vehicle for compounding wealth at high rates of return for a long, long time – is a business that sells a highly valuable and desirable intangible.

“And I’ve found just such a company for my Extreme Value subscribers….

“I’ve been watching this company for years. And it had always been too expensive to recommend, until now….

“It consistently generates 30%-plus returns on capital (adjusted for excess cash)…

“It gushes free cash flow and requires little reinvestment to keep it growing at a double-digit annual rate…

“It has raised its dividend every year for almost two decades. For the last 10 years, the dividend has grown more than 20% a year…

“It has no debt and more than $1 billion in cash…

“Employee compensation is uniquely structured to inspire great performance… and it works…

“In short, this is my dream business. If I could only own one business for the rest of my life, this might be it.”

So what is it? That’s a fairly tough list of clues, but I’ve got it narrowed down a bit … and then he throws out a couple more tidbits:

“This one-of-a-kind company dominates its industry in two important ways that will hold the competition at bay and keep it in the No. 1 spot for a long time.

“It’s one of the greatest wealth-generators on the planet… growing shareholder net worth at more than 17% a year for a decade. It generates almost $3 of market cap for every $1 of earnings it has retained during that time. It’s like a bank account that safely triples your money every 10 years.

“And the price is finally right. This business normally trades at sky-high earnings multiples because everyone knows it’s highly valuable. But now, investors have become skeptical about the global economy… the 2012 presidential election… rising taxes… the European crisis… and China’s economic slowdown…

“So the valuation has fallen to its lowest level in 15 years. Investors don’t understand how none of this matters. This business will seem like the greatest bargain on Earth in another couple years.”

What, then, will Ferris be picking next time around? Well, I have to admit up front that due to the squishiness of some of those clues we’ll have to still call this one a guess, but the top contender identified by the Thinkolator to be this pick is … Expeditors International of Washington (EXPD)

Why EXPD? Well, it has indeed been a dominant company in its little niche of freight forwarding and services for many years, and it has grown the dividend by an average of better than 20% a year for a decade, with raises every year for “almost 20 years” (17 years now), it does have about a billion dollars in cash and no debt, it has been expensive for a long time but has never been as cheap as it is today, it does have a unique compensation system that has served them very well … and, to top it off a bit, I’m sure this high-return, high-multiple business has been staring Dan Ferris in the face and frustrating him with its persistent high valuation for many years, since it’s headquartered not too far from his home turf in the Pacific Northwest. There are some other companies that come close to matching Ferris’ clues, including Caterpillar (CAT), but none that I’ve sifted through match as well as EXPD.

I can tell you that the stock has also tempted me for a long time, but in the past I always found it too expensive to consider — so I appreciate Ferris calling it to my attention with this tease (assuming I’m right about his pick), since I hadn’t noticed the downturn in the share price and the valuation this year.

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Expeditors does something that seems like it should be a simple, commoditized business — it does freight forwarding and express shipping and customs management for its customers, who include manufacturers and infrastructure companies and any number of other folks who need to move stuff around the world but who can’t or don’t want to efficiently deal with managing the logistics themselves. That might mean someone shipping a bridge span from Chicago to Shanghai, someone who wants to move half a container of furniture from Indonesia to New York City, a manufacturer that needs to efficiently ship thousands of laptops overnight around the country, or pretty much anything you can imagine. Here’s how they describe themselves on their website:

“Expeditors is a global logistics company headquartered in Seattle, Washington. As a Fortune 500 company, we employ over 13,000 trained professionals in a worldwide network of over 250 locations across six continents. Expeditors satisfies the increasingly sophisticated needs of international trade through customized solutions and seamless, integrated information systems. Our services include air and ocean freight consolidation and forwarding, vendor consolidation, customs clearance, cargo insurance, distribution and other value added logistics services.”

The unique compensation structure is a system that incentivizes their regional and local office staff and management both by using commissions, and by using each office’s earnings to set bonuses for the local workers. So local employees are highly incentivized both to bring in new shipping customers in their local area, and to keep existing customers happy and using EXPD services more heavily. This isn’t a breakthrough in compensation, obviously, but it does bring incentives for the whole company in line with what the company needs to grow and perform, with great clarity for everyone involved, and it’s apparently unique in the industry.

Expeditor’s also does a better job than most companies of interacting with investors — including frank commentary from management, and published answers to questions from regular investors, you can get an idea of their filings and commentary from the recent items published on their investor relations page.

Expeditors is indeed in a cyclical industry — they ship stuff around the world, so when business is good for the world their business grows, and when trade slows their business becomes more challenging. Given their history of consistently increasing cash flow and managing through several weak trading environments in the past (their only dip in free cash flow and earnings in the past decade came in 2009, and bounced back to