FedEx Corporation (NYSE:FDX) pioneered overnight delivery services in 1973. Since then, this North American firm has grown to become the world’s largest express delivery company, followed by United Parcel Services (NYSE:UPS) and DHL, operated by Deutsche Post AG (DPW.DE). Apart from its core express product, the firm has diversified now to offer a vast portfolio of transportation, e-commerce and business services.
A Narrow Moat
FedEx boasts a narrow economic moat that stems from its global shipping network, efficient scale and subsequent cost advantages. It is highly difficult for any competitor to replicate its business, given the huge volumes it would have to develop in order to cover the immense fixed costs of such a system. Thus, the company’s positioning as one of only two colossi in the U.S. domestic parcel shipping is not expected to change. The immense parcel volumes handled by FedEx provide a cost advantage that makes pricing competition difficult for lower-volume entrants. Proof of this is the case of competent DHL, which after massive losses and a full decade trying to consolidate its domestic express delivery business, finally exited this market in 2009.
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Moreover, the company has improved its competitive advantages by diversifying into additional shipping modes in order to better meet customers’ needs. Hence, the firm purchased assets for domestic ground delivery and less-than-truckload freight, and also built an asset-light air and ocean forwarding network.
Since the great recession, a strong customer trend towards switching from express delivery to cheaper ground services has been consolidating, which clearly reflects on the earnings generated by each division. Furthermore, while the express segment generated about 60% of total sales, the firm’s ground operations generated 60% of total operating profits on 24% of total sales in fiscal 2013. Consequently, FedEx is expanding its high-margin ground business to boost profits and cover customers’ increasing demand. To better match changing trends, the firm is also realigning its international express operations, which reported growth of lower-yield international economy shipments and decay in international priority volume.
Higher Rates and Cost Savings
FedEx continues to successfully implement higher shipping rates, thus enlarging revenue growth. Along these lines, the firm increased its FedEx Express rates by 3.9% and its FedEx Ground rates by 4.9% for 2014. It also introduced “FedEx One Rate”, a flat rate shipping system available on Express packages, for individual shippers and small businesses.
Moving forward, the company has set a target of 1.6 billion in incremental profit at FedEx Express for 2016 and 30% improvement in fuel efficiency of its fleet for 2020. To this aim, the company is investing in infrastructure developments like the modernization of its fleet through the acquisition of fuel-efficient aircrafts, which will improve the firm’s cost structure by means of reducing fuel consumption.
FedEx profitability improvements and its stock repurchase program are expected to hit on earnings. Consequently, the company has increased its 2014 earnings growth guidance to between 8% to 14% per share from its earlier 7% to 13% range. Its stocks trade at 26.4 its trailing earnings, a slight premium compared to the industry median of 23.1. Its return on equity is 9% against its rivals’ 6% average, and its return on capital showcases a healthy 13.20% compared to the industry average of 7.20%. Moreover, improved pricing, volume yield and cost structure will continue to bolster profits. Investment guru Daniel Loeb (Trades, Portfolio) recently increased his holdings by 25% backing my feeling that these stocks are a solid investment opportunity with long-term growth potential.
Disclosure: Vanina Egea holds no position in any stocks mentioned.