FedEx Corporation (FDX, Financial) offers good value for the money, in my view, following its 19% stock price decline in the past year.
The mail carrier and shipping business is implementing new technology, aiming to become more efficient and expanding its presence across the U.S.
Investing in new technology
The company is investing in new technology to increase its efficiency and improve its financial performance. For example, in its fiscal 2020 second quarter, FedEx rolled out its dynamic route optimization (DRO) technology. This provides FedEx’s delivery drivers with real-time data on the most efficient routes to use when delivering their packages.
This could lead to a more reliable and punctual delivery service for the company’s customers, which may strengthen FedEx’s market position compared to its sector peers. The DRO technology may enable the company’s drivers to work more productively and deliver a greater volume of packages than they have done in the past. This could catalyze the company’s financial performance after its modest upfront investment in the technology.
Growth potential
The business is increasing the number of retail stores where its packages can be dropped off or collected by its customers. For example, in the first half of fiscal 2020, it added 1,800 Dollar General (DG, Financial) stores to its list of retail locations so that it now has drop off and collection points across 14,000 retail stores in the U.S. It plans to continue to expand its presence across retail stores such as Walgreens (WBA, Financial) so that by fiscal 2021, 90% of the U.S. population will live within five miles of a Fedex drop off and pickup location.
In addition, the company is investing in its returns business. This is where its customers can either arrange for FedEx to collect an item they wish to return to the original sender, or drop off their return at a FedEx location. The company currently has a low market share of the returns business compared to its sector peers. The returns segment offers high growth potential, since 15% of e-commerce purchases are returned each year.
The business is also increasing the geographic coverage of its freight services for larger items such as furniture. It plans to increase its freight services coverage from 81% to 90% of the U.S. population in fiscal 2020. This could boost its financial performance and strengthen its market position.
Potential challenges
The company reported disappointing financial results in its fiscal 2020 second quarter. Adjusted revenue declined $500 million to $17.3 billion compared to the fiscal 2019 second quarter. This was caused by weak demand in some of the company’s key markets. Economic growth in the U.S. slowed in the 2019 calendar year, while Brexit uncertainty in the UK also led to lower demand for the company’s shipping services. FedEx also expects China’s slowing economic growth rate from 2019 to carry on in the first half of calendar 2020, which could act as a drag on its financial performance.
The company expects to realise cost savings from its acquisition of TNT in Europe from fiscal 2021 onwards. It anticipates that its cost savings will increase significantly after it integrates TNT air delivery services into its business in fiscal 2022. This could help FedEx to offset its disappointing sales growth through higher margins. In addition, the company plans to retire 39 of its most costly aircraft over the next 30 months, according to its second quarter results. This could improve its efficiency and boost financial performance.
Outlook
Market analysts forecast that the stock will record a 15.5% rise in its earnings per share in fiscal 2021. Its forward price-earnings ratio of 13.8 suggests that the stock offers a margin of safety as it implements its growth strategy.
Disclosure: the author has no position in any stocks mentioned.
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