FedEx Corp (FDX, Financial) (“FedEx”) – FedEx operates one of the world’s largest package delivery and logistics businesses. Beginning in the early 1970s, founder Fred Smith began building a network of sorting facilities, aircraft and last-mile capabilities that has become one of very few key players in an oligopolistic market dominated by operators who have scale and control of a variety of key assets that are virtually impossible to replicate. In spite of its record of creating extraordinary shareholder value over decades, FedEx has had a number of operational headwinds over the last few years. First, the expansion and evolution of its ground delivery services in order to meet rapidly growing ecommerce demand has required costly investment and created inefficiencies in the FedEx Ground network in the near-term. Secondly, in 2016, FedEx acquired TNT to expand its European operations and grow scale within its FedEx Express line of business. This is a business that was already inherently less profitable and more capital intensive than its FedEx Ground business. From an integration perspective, the TNT acquisition has proved more difficult and a larger headwind to operating performance than anticipated. Meanwhile, political impediments to global trade in 2019 compounded the challenges for FedEx Express, which is primarily a business to business service. We have developed the view that FedEx’s substantial investments to continue supremacy for decades to come in an evolving ecommerce market place are sensible and strategic. We also believe that the costs associated with the TNT integration will dissipate in coming quarters and that FedEx management is strategically positioning FedEx to maintain its critical status in the secularly growing package delivery oligopoly. Over time we would expect FedEx to navigate a return towards historical levels of profitability and returns on capital, in addition to meaningfully growing overall business volume in the future. Our estimates suggest that this should also result in a substantially higher share price. As it stands today, the company is valued at roughly 10x depressed trailing earnings.
From the Third Avenue Value Fund (Trades, Portfolio)'s first-quarter 2020 commentary.
