Are the drones really a threat to FedEx?
Key Stats for FedEx Corporation
| Ticker | FDX |
|---|---|
| Sector | Other Air Freight & Logistics |
| Latest price | $215.23 |
| Value | $57,547M |
| Daily vol | $440M |
| Date | 30 June 2017 |
| Links | SEC Filings, fedex.com |
1. They Deliver!
FedEx provides a portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the FedEx brand.
Though they do own the TNT Express brand as well, buying it in May 2016 for $5bn, from the Dutch Post Office... don't ask!
- There are 5 divisions FedEx Express, TNT Express, FedEx Ground, FedEx Freight and FedEx Services.
- If you are wondering Express is a time-guaranteed delivery service. Ground is the cheap / slow service
- The Services segment provides the other divisions with sales, marketing, information technology, communications, customer service and other back-office support.
- And you won't be surprised that 90% of the profit comes from Express & Ground, with TNT and Freight lost in the rounding.
Now, FedEx has a year end on 31st May... so guess what... they reported this week :)
| year to May | 2013A | 2014A | 2015A | 2016A | 2017A |
|---|---|---|---|---|---|
| Revenue | $44bn | $46bn | $47bn | $50bn | $60bn |
| Reported EPS | $8.55 | $7.48 | $3.65 | $6.51 | $11.07 |
| Adjusted EPS | n/a | n/a | n/a | $10.80 | $12.30 |
But don't get too excited by the jump in sales... that is what happens when you buy TNT. Strip it out and sales were up 5%. Which is still pretty good.
And on the bottom line, there were some nasty exceptionals in 2015 and 2016, so it's a little less remarkable a jump as seems. Though Adjusted earnings up 14% is impressive.
And despite the acquisition of TNT last year, FDX has got a reasonable debt level of circa $10bn, i.e. 1.4x operating profit. So there's little risk to their dividends or share buyback program!
2. Would UPS be better?
At the topline, UPS and FDX are perfect rivals. There's little difference in margins though returns are substantially better at UPS.
The logistics business is clearly better than the two big European postmen. (note: DP owns DHL). Though the industry has substantially lower margins than the railroads. Why? I assume it's cos they are local monopolies?
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| FedEx Corporation | $60,319M | 14% | 20% |
| United Parcel Service, Inc. | $61,803M | 12% | 231% |
| Expeditors International of Washington | $6,225M | 11% | 23% |
| Foreigners | |||
| Deutsche Post AG | €57,334M | 8% | 24% |
| Royal Mail PLC | £9,776M | 10% | 6% |
| Freight | |||
| Union Pacific Corporation | $20,244M | 47% | 22% |
| CSX Corporation | $11,320M | 43% | 15% |
| Norfolk Southern Corp. | $10,043M | 41% | 14% |
| Kansas City Southern | $2,381M | 48% | 13% |
So it's not a surprise that investors value railroads the highest, then logistics then postmen. Though it seems there is a preference for UPS over FedEx.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| FDX | $57,547M | 16x | 12% | 1% | 11% |
| UPS | $95,263M | 18x | 8% | 3% | 9% |
| EXPD.O | $10,082M | 24x | 6% | 1% | 6% |
| Foreigners | |||||
| DPWGN.DE | €39,437M | 14X | 11% | 3% | 13% |
| RMG.L | £4,151M | 11x | 0% | 6% | 20% |
| Freight | |||||
| UNP | $87,115M | 19x | 12% | 2% | 9% |
| CSX.O | $49,655M | 24x | 15% | 1% | 7% |
| NSC | $34,635M | 19x | 12% | 2% | 10% |
| KSU | $10,873M | 20x | 13% | 1% | 9% |
3. Wall Street like them both!
Sticking with the UPS v FDX theme:
- The brokers on Wall Street say Buy FedEx and expect a 7% upside to the $230 price target
- For UPS they say Hold with a price target just 4% higher than today.
In the last 2 years, FDX has traded between 12 and 18x earnings, with UPS trading between 16 and 21x. So the UPS love's been pretty extended. Though they did downgrade UPS to a Hold in Dec.
4. Time to fly?
It's worth a look at this week's management presentation where they see moderate economic growth and adjusted earnings up between 7 to 14% in the next year.
The integration of TNT is key to the figures, as it was break-even last year. They've only owned it 1 year, and we can expect a few more years to get it to FedEx levels of cash-flow.
And as for drones and Amazon, they feel like pie in the sky for now. In fact when Bezos is asked about FedEx UPS or the US Postal Service he's said:
We will take all the capacity that the U.S. Postal Service can give us and that UPS can give us and we still need to supplement it. So we’re not cutting back. We’re growing our business with UPS. We’re growing our business with the U.S. Postal Service.
It's as if Amazon is growing so fast that it's main concern is delivering what it sells, not who does the delivery!
All in all.. a large cap, potential 10% grower... benefiting from e-commerce, with margin improvements and cash back.
It looks like FDX should deliver!
View the archive of Stock a Day posts at r/stockaday.
Disclosure:
I have no position in any of the stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Author:
- u/shane_stockflare
- Shane Leonard, CFA
Submitted June 30, 2017 at 09:59AM by shane_stockflare http://ift.tt/2s9s6Mb
