Is There Hope For FedEx?

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A generation ago, you could only deliver a package by slapping half a booklet of stamps on the side and driving to the nearest post office.  Today, a bevy of companies and technologies compete for your business using transportation methods ranging from overnight air delivery to drones that can touch down a grocery list on your front door.  With more companies and more innovation comes threat to the top of the food chain.  FedEx, the second-largest delivery company in the United States, has felt the heat more than any of its competitors, having faced three consecutive months of losses on the market and setting new 52-week lows after dropping from nearly $200 a share to just under $150 today.  Can FedEx deliver a solution to their market woes?

Shipping Lanes

Just two years ago, FedEx had their heads as well as their planes in the clouds.  Their stock price (FDX on the NYSE, trading for $149.48 a share) doubled between 2009 and 2013, the same span of time when the Dow Jones Industrial Average had gained only a little over 10% in the slow and painful recovery from the recession.  FedEx looked to be ahead of competitors like UPS and DHL by downsizing the unprofitable Express network while also re-structuring employee buyouts, moves that saved billions per year to free up valuable cash flow for investments in a new fleet of aircraft.  With the cost of fuel falling and the rate of shipping up, it seemed like FedEx appeared well able to position themselves to overtake UPS as the biggest private shipper in town.  Then came a bevy of questions on the global market: while the dollar hummed along fine, FedEx took their International Priority numbers on the chin thanks to crisis after crisis in Greece, Brazil, China, Australia, and the EU.  The company had to minimize their flight routes going into Asia in order to maintain cost surety while also retiring aircraft ahead of schedule to thin out the herd.  The company stumbled their way through 2014 without any good news and has seen their worst year in almost a decade with the advent of 2015.  With their earnings report due next week, FedEx could be looking at a disastrous day on the market in their near future.

Domestic Demand

While the US market hasn't done as poorly as the international market, it's still represented a difficulty for their operations.  FedEx capital expenditure has changed their domestic policy to focus on ground shipment rather than air shipment given a broad trend among consumers to prefer to get packages at a later date for a cheaper price tag.  With about one billion dollars per year invested in the e-shipment business, FedEx needs the current trend of online spending to accelerate in the worst way.  While online spending is certainly here to stay -- 2014 was the first Christmas in which more money changed hands online than in stores -- it's not ramping up quite as fast as it did in the past five years, when less than a quarter of all transactions took place with the click of a mouse.  That puts FedEx in the prickly position of being unsure whether or not they should divest of traditional methods in favor of swinging for the fences, or minimize risk and reward alike by keeping standard delivery options available to offline shoppers.  It's a position that has done it little favor in the marketplace.  Currently, FedEx trades for less than 15 times their forward earnings; compare that to Apple at about 10 times and you'll see that there's little confidence that FedEx will return good value on the investment.  Fear that the continued pressure on the broader global economy will affect FedEx's bottom line has kept many investors from putting their money in the company's pockets.  A strong earnings report could quash such skittishness, but FedEx needs a lot of luck to pull a rabbit out of that particular investment hat.

  • The Takeaway: FedEx hasn't inspired much confidence on the market, and for good reason.  Their policies need a dire tweak in order to stay relevant as their customer base changes their spending habit.  Since their trading value is so far below their P/E ratio, however, FedEx represents a "safe" stock: their valuation has swung down in the past three months but is likely lower-bound to very close to the current asking price.  That makes the investment choice easy -- portfolios that need a hedge against higher-risk stocks can include FedEx as a mechanism for stability, if not growth.  Given their 52-week low, FedEx is a value buy but likely not much of a growth buy, at least not for the immediate future. 
  • What's been lukewarm for FedEx has been about the same for its competition.  UPS' stock price has by and large followed the same trajectory of FedEx, including a 2015 slump, but they've released their earnings reports and have already faced the consequences of less-than-great performance.  As such, there's some hope to be had in FedEx, but not in many of the other logistics companies.  Investors looking for logistics or transportation stock that's riding the wave of low gas prices will have to wait awhile longer before any serious contenders appear on the horizon.

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