Investing in Companies Benefitting from Supply Issues

By: Stacey Nickens

I was visiting a friend recently who decided to make me meatballs. They mixed up the spices and ground turkey, but instead of throwing the meatballs in their oven, they pulled a chunky convection oven out of a cabinet. As they put the meatballs into the convection oven, they explained that their normal oven had broken months ago. However, due to the supply chain issues, they still hadn’t received their new oven!

With COVID-19 shutting down factories, supply chain constrains have caused serious issues across industries. People have waited months for new laptops and other technologies. As frustrating as this may be, investors can adapt to the situation and consider investing in a few companies who may benefit from these supply chain constraints.

GXO Logistics (GXO)
In an effort to combat supply chain constraints and continue to evolve, more companies are using smart sensors to track when inventory falls to low levels. These systems then automatically order more inventory. GXO Logistics steps into the picture by providing smart warehousing solutions. GXO’s automated warehouses are on the forefront of a new type of e-commerce. Currently, only 5% of warehouses are automated. As e-commerce continues to accelerate, and companies adapt their approach to inventory in order to work with supply chain issues and meet customer demand, automated warehouses may become the way of the future. GXO Logistics is accordingly well-positioned for long-term growth.

GXO also has a strong business model. Over 90% of their customers sign multi-year contracts, with the average tenure for its top customers being 15 years. Additionally, no one customer accounts for more than 4% of its sales. GXO has thus likely locked in some customer loyalty while also ensuring that losing one customer will not significantly impact its business.

Expeditors International of Washington, Inc. (EXPD)
Expeditors operates as a service provider in airfreight, ocean freight, and customs brokerage. Instead of owning planes or ships, the company purchases cargo space and uses the space to service customer needs. As a result, Expeditors has been able to develop a cash rich and debt-free balance sheet.

Supply chain constraints have slowed the order-to-delivery pipeline. As companies work to appease customers, freight rates have risen and space aboard planes and ships has become tight. Expeditors has been able to use its strong balance sheet, healthy revenue, and long-term relationships to profit from this environment. For one, with no debt, Expeditors has easily advanced credit to worthy customers, generating loyalty by helping their customers manage increased freight costs. Additionally, Expeditors has leveraged its revenue and relationships to secure space aboard packed, in-demand planes and ships.

These methods have allowed Expeditors to significantly grow its earnings in the past year. Before 2020, Expeditors earned around $3.50 per share, and by the end of 2021, earnings will likely be around $7 per share. This earnings bump is also unlikely to be transitory. The above methods could help Expeditors form strong relationships with its customers, allowing the company to show health for many years moving forward.

Sources: Seeking Alpha