In the early moments of trading today, FedEx's stock broke below $200 a share, the first time since mid-2017. Of course, this new bit of anxiety is because of Amazon Air.
Founded in 1971, FedEx made overnight shipping a standard for business and consumer goods and along with United Parcel Service (UPS, Financial) have a virtual duopoly on the shipping industry. That's one of the reasons why Amazon is looking to make its own way. This is more of a blow to UPS than FedEx as UPS and the USPS handle the majority of Amazon's packages. FedEx will still be the go-to service provider for its customers and ride the online-shopping, next-day delivery boom higher.
FedEx has a massive international shipping network that would be too difficult and too costly to duplicate, even for Amazon. The 2016 TNT Express acquisition gave FedEx the opportunity to operate and improve ground shipping operations in Europe, which it has along with the upward trend in online fulfillment. And, even if it doesn't produce the same margins as in the U.S., the FedEx brand will continue to strengthen. The company should continue to improve its competitive advantage, because it can remain focused on what it does best. Despite all the fanfare over Amazon Air, the retail/technology giant is going to have trouble replicating what its partner UPS does for them.
Here is a financial snapshot of the last five years. The company has significantly increased sales, book value, dividends and earnings per share in the face of lower margins.
Looking forward, FedEx could generate over $20 a share in fiscal year 2020. That puts its forward price-earnings ratio under 10x, a sizable pricing error by the market -- especially considering that the company's current multiples are lower than the industry, the S&P 500 and its own five-year averages.
More importantly, the company is getting ready for another record holiday season, but unlike its competition, will not be applying surcharges for residential deliveries. In January, FedEx is raising base rates at its Express and Ground units by 4.9%, while the Freight division is set for a 5.9% hike. It will also begin charging for misshapen and oversized parcels like furniture and sports equipment. Saturday deliveries will now be year round, which should help FedEx close the gap in sales performance between it and UPS over time. It has also established partnerships with two big retailers, Walmart and Walgreens, to let online shoppers pick up and drop off parcels at physical retail locations.Â
All in all, the dominance should continue long term and when you can buy at bargain prices like these, it's a no-brainer. Just ask Michael Larson, portfolio manager at the Bill & Melinda Gates Foundation. The trust owns over 3 million shares, representing 2.8% of the portfolio, and has been buying up the stock almost every quarter since 2007.
Disclosure: I am not long/short any stock mentioned in this article.
