While, e-commerce has sabotaged the high revenue times of the brick-and-mortar retailers and left them with squeezed margins, it has done well for another industry. I am talking about the supply chain and cargo industry, which has gained from this surge in e-commerce as it has expanded reach and brought affordability to many households. One of the companies in this industry that has benefitted by this trend and has been on the high horse since the beginning of the year, is FedEx (FDX, Financial). This betterment in operations and increasing confidence of investors is evidenced by the 30% surge in stock price over the last 12 months. The company, founded in 1971 and based in Memphis, Tennessee, had a great earnings report recently and, going into the Christmas season, would appear to be a nice play for investors.
Solid quarter
FedEx, in its last reported quarter, posted an increase in both sales and operating margins in all its three segments -- Express, Ground, and Freight. The company's Freight segment reported a notable growth with its revenue surging by 13% and income by 7%, as its average daily shipments in its "LTL," or "less-than-truckload" category, grew remarkably. FedEx's largest division, its Express segment, which contributes about two-fifths of the company's total revenue, grew moderately by 4% both in terms of revenue and earnings. On overall terms as well, the company put up a good show by reporting a reasonable increase of 6% y-o-y in revenue to $11.7 billion, which also beat Street estimate of $11.4 billion.
The Ground segment of the company has become an indispensable and high-growth area for the company in the past quarters as it has grown over 56% in the last four years. The Ground segment accounts for half of the Express segment's revenue, but it generates a reasonably high operating margin. In the last reported quarter, the Ground segment's revenue grew 8%, with its operating margins increasing to 18.4%. Due to overall network expansion costs, the rise in the Ground segment's operating margin was somewhat neutralized, but the company expects this division to grow on a sustainable basis. Undeniably, Ground division is one of the biggest opportunities for FedEx. The Ground division's growth should help FedEx boost its companywide profit margin over time by driving a mix shift toward the most profitable part of its business.
Smart cost-cutting initiatives
Adept cost management is one of the things that is hard to efficiently execute but once done, it gives optimum results in terms of margin expansion. The CEO of FedEx, Mr Fred Smith, had announced his intent to make all three of the above-mentioned divisions, operating at double-digit margins. Well, FedEx has already embarked on a multiyear cost-cutting plan that is aimed to achieve $1.7 billion in profit improvement, in the Express division. Besides shedding jobs and improving technology that will help the giant carrier in streamlining staff and operations, the top area to cut costs will be aircraft replacement. As per reports, FedEx will retire 40 outdated MD-10s and replace them with a similar number of new Boeing 767s in the next four years. Each replacement is expected to boost operating profit by $10 million, thanks to lower fuel and maintenance costs. This fleet renewal program will lead to hundreds of millions of dollars in annual cost savings just a few years from now, helping return the Express division to double-digit margin territory.
E-commerce is booming
At the onset, I mentioned about the phenomenal growth in e-commerce that has lent strength to FedEx’s operations. According to a survey by Forrester Research, e-commerce is estimated to grow from $263 billion in 2013 to $414 billion in 2018 in the U.S. alone, which interestingly represents just 11% of the total U.S. retail sales thereby, providing many lucrative opportunities in the future. Certain analysts have expressed scepticism about the fact that growing e-commerce chains might soon start an in-house supply chain mechanism, with a view to cut costs and ensure quality. In my opinion though, this is a far-fetched notion because most of the growing e-commerce chains are facing intense competition and industry saturation. In such a case, it would be prudent for the companies to invest in initiatives that improve customer adoption and foster brand loyalty. In a bid to develop their own package delivery system, these retailers would have to invest heavily in manpower and other infrastructure and this would not be a wise move, considering the high growth and intensely competitive phase, that is prevalent in the e-commerce industry.
Takeaway
By now, it is amply clear that this package delivery service giant has a reasonable number of opportunities in the future. In addition to that, the stock is trading at a forward multiple of 14.77 and has a PEG ratio of around 1.41, both favourable when compared to the industry average. As such, FedEx scores high on being the ideal candidate for your portfolio.
