FedEx (
FDX
) is a holding company with subsidiaries that provide a broad range
of transportation, e-commerce and business services under the FedEx
brand. Its primary operating companies are Federal Express
Corporation ("FedEx Express"), the world's largest express
transportation company; FedEx Ground Package System, Inc. ("FedEx
Ground"), a leading provider of small package ground delivery
services; and the FedEx Freight LTL Group, which comprises the
FedEx Freight and FedEx National LTL businesses of FedEx Freight
Corporation.
The company reported annual revenue of $42.7 billion in FY2012
with operating income of over $3 billion. We have a
$122 price estimate
for the company, which is around 15% above the current market
price. Here we discuss the outlook for some of its key divisions
and drivers critical to our valuation.
See our complete analysis for FedEx
FedEx Express Overview
FedEx Express offers a wide range of shipping services for the
U.S. domestic and international delivery of small packages and
freight. U.S. Express provides guaranteed delivery of deferred
packages in two to three days and overnight delivery of urgent
items within the U.S. through its
Overnight Box
and
Overnight Envelop
offerings. International Express guarantees time-definite
delivery service to more than 220 countries and territories with
unparalleled air route authorities and an extensive air/ground
infrastructure. The division operates more than 45,000 motorized
vehicles and a massive fleet of over 650 aircrafts knitting
together more than 375 airports worldwide. It contributed more than
62% in revenues during FY2012. Here are two factors that are
driving FedEx Express.
Brighter U.S. Economy Outlook and Penetration in
Asia
Compared to the last four years, we expect a relatively healthy
U.S. economy with around a 2% GDP growth rate in 2013. A pick-up in
economic activity and consumer spending is expected to drive demand
for higher priced Overnight Express services in the U.S. market.
While the European economy is still marred with uncertainties, a
larger penetration in the Asian markets and reduced shipment time
across the Pacific with the inclusion of Boeing 777F are expected
to drive volumes for this segment.
Voluntary Buyout Program and Fuel Efficiency
On February 15, 2013, FedEx Express and other FedEx
companies offered voluntary cash buyouts to the eligible U.S.-based
employees. The program, which is aimed at increasing overall
profitability by around $1.7 billion during the next three years,
is expected to result in $650 million pretax cash expenditure for
FY2013. Higher fuel efficiency targets set by the company after
outperforming its earlier target of a 20% improvement in fuel
economy by 2020 as compared to 2005 will also push EBITDA margins
higher for FedEx Express division.
FedEx Ground Overview
FedEx Ground offers small-package ground delivery services and
low-cost, day-certain service in the U.S. and Canada. It also
includes the
Smartpost
service that uses a hybrid delivery mechanism leveraging the
delivery networks of U.S. Postal Service or Canada Post Corporation
for final delivery. While the division's contribution to FY2012
revenues was less than 25%, it was the source of more than 50% of
the company's consolidated operating income. Below are a few
trends driving our valuation for the division that makes up more
than two-thirds of our price estimate.
Continued Ground Network Expansion
Since 2002, FedEx Ground has opened 11 new hubs, featuring the most
advanced material handling technology. It has also expanded
and/or relocated more than 500 local facilities. The expansion
is expected to continue in the future that will increase FedEx
Ground's average daily package volume.
Rise of e-Commerce and Smartpost
According to research done by comScore and Forrester, the
e-commerce market is expected to be worth $250 billion by 2016.
With growing expectations of free shipping of goods purchased
through the fast-growing electronic market, e-retailers are
increasingly adopting the low-cost "hybrid" alternatives like the
Smartpost
offered by FedEx to cut down on shipment costs. This is expected to
drive volumes higher for these offerings. On the other hand, rising
fuel prices and expected price hikes by the U.S. Postal
Service as it tries to crawl out from its massive debt are expected
to drive revenues per package higher as well.
Understand
How a Company's Products Impact its Stock Price at Trefis