For savvy investors, it’s essential to keep an eye on investments as the unpredictable 2023 is reaching a climax. With an air of uncertainty and market fluctuations, it’s time to delve into the intricacies of three prominent companies and the risks they face. The vulnerabilities of these three companies shed light on the challenges that could jeopardize their market valuation.
Despite its rich history and significant presence in the logistics industry, the first one on the list is perilously reliant on air and ocean freight services. As the tides of market demand ebb and flow, this dependence poses a substantial risk to its financial performance. The second one, while a titan in the world of freight services, grapples with the industry’s cyclical nature, susceptible to the whims of demand and truck capacity, making it a challenging voyage to predict when the downturn will end.
The third one’s fortunes are tethered to the capricious world of cinema. Its growth is inextricably tied to the success of movies, a factor it can’t control. High debt levels and liquidity concerns further add complexity to this cinematic journey.
Discover how these external factors and market dynamics could sway the financial fortunes of these companies and influence their market values. As the year’s end approaches, it’s time to evaluate these stocks and decide whether to part ways with these potentially risky assets.
Expeditors (NASDAQ:EXPD) has a long history and a significant presence in the logistics industry. A fundamental weakness that may adversely impact its growth potential is its reliance on air and ocean freight services, constituting a substantial portion of its revenues.
As of Q2 2023, the company witnessed a decline in airfreight and ocean freight metrics. For instance, airfreight tonnage volume decreased by 15% year-over-year (YoY), and ocean container volume decreased by 13% YoY. That overreliance on specific modes of transportation makes the company vulnerable to market fluctuations and changes in demand. When these modes of transportation face challenges, as they currently do, it directly impacts Expeditors’ performance and, consequently, its growth potential.
Another fundamental weakness lies in the declining rates and pricing pressure that Expeditors is facing. Average sell rates decreased significantly due to lower buy rates driven by declining market rates. Pricing pressure has become a critical determining factor for shippers. Therefore, the rate decline directly impacted the company’s revenues and operating income.
Furthermore, as global supply chain congestion has effectively disappeared, pricing pressure has intensified. As of Q2 2023, average sell rates (airfreight) decreased by 49% YoY, average buy rates (airfreight) decreased by 52% YoY, average sell rates (ocean freight consolidation) decreased by 66% YoY and average buy rates (ocean freight consolidation) decreased by 70% YoY.
Finally, Expeditors face challenges in adapting to shifting market dynamics. With the return of passenger belly space, total air cargo capacity now exceeds pre-pandemic levels, leading to excess capacity. That is coupled with higher utilization of freighter capacity compared to pre-pandemic levels. Despite increased air capacity, shippers face uncertain demand for their products as consumers remain cautious amidst declines in their purchasing power. Thus, these shifting dynamics have led to a supply-and-demand imbalance.
Landstar (NASDAQ:LSTR) faces a series of fundamental weaknesses that may hinder the company’s growth potential. One of the most fundamental weaknesses is its susceptibility to the cyclical nature of the freight industry.
The ebb and flow of the market heavily influences the company’s revenue, which can last six to eight quarters. The level of demand for freight services profoundly influences Landstar’s revenue. Strong demand can increase revenue during up-cycles, while down-cycles result in reduced demand and lower revenue. Currently, the industry is experiencing a period of soft demand. Therefore, it is challenging for Landstar to predict when this downcycle will end.
Additionally, truck capacity availability within the industry is pivotal in Landstar’s performance. In recent months, truck orders have slowed, and industry-wide DOT truck revocations have exceeded DOT truck authorizations, indicating constraints in truck capacity. Also, the difference between industry-wide contracts and spot pricing affects the revenue cycle. When contract rates are higher than spot rates, Landstar’s revenue increases, and vice versa.
Since reaching its peak in the Q2 2022 second quarter, Landstar has faced a downcycle, with quarterly revenue decreasing over the past four quarters. The primary challenge now lies in predicting when the current downcycle will end and when revenue will show an upward trend.
Lastly, another specific and quantifiable weakness for Landstar is the decrease in load volume. The company’s total truck revenue in Q2 2023 represented a substantial 29% YoY decrease. That significant decline is primarily attributed to a 16% YoY decrease in load volume and a 15% YoY decrease in revenue per load. The soft demand and challenging market conditions have significantly affected this reduction, impacting the company’s revenue and growth prospects.
AMC’s (NYSE:AMC) business model relies heavily on external factors, primarily the production and success of movies. That is an inherent characteristic of the movie theater industry. However, AMC’s growth potential is directly tied to the ability of studios to produce compelling and successful films.
The company’s performance in Q2 2023 was primarily attributed to the release of blockbuster titles. Those included “Super Mario Bros.,” “Guardians of the Galaxy,” “Spider-Man,” “Fast and Furious,” “Transformers,” and “The Little Mermaid.” However, the favorable outcomes in the movie industry are unpredictable. A lack of attractive film titles or a decline in moviegoer interest may significantly impact AMC’s performance.
About leverage, despite efforts to reduce debt, AMC still carries a significant debt load. The company repurchased debt at an average discount of 34%, highlighting the burden of debt servicing costs. High debt levels can limit financial flexibility and profitability. That’s especially true when interest rates rise, as has been the case over the last 19 months. Servicing a substantial debt load can consume a significant portion of the company’s cash flow, which leaves less room for operational and growth initiatives.
Finally, AMC has liquidity issues to solve. AMC’s ability to maintain sufficient liquidity is a crucial concern. While the company had $643 million in liquidity at the end of Q2 2023, the potential cash burn in seasonally weaker months and uncertainties related to the writers’ and actors’ strikes indicate ongoing challenges. It’s essential to note that AMC has been actively managing its liquidity, which includes raising equity capital and reducing debt. However, the need for continuous capital to support operations raises questions about the sustainability of market valuations.
On the date of publication, Yiannis Zourmpanos did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.