FedEx (FDX, Financial)'s increasing use of new technology alongside innovative services could enhance its financial prospects.
The delivery services company is aiming to differentiate its offering from rivals through faster services, while also cutting costs. Having fallen 29% in the last year versus a 7% rise for the S&P 500, the stock offers a wide margin of safety that suggests a recovery may be ahead.
Investing in innovative services
FedEx is working with retailers to use their stores as local fulfilment centers so that consumers have a wider range of convenient drop-off and collection points. Dollar General (DG, Financial) is the latest retailer that will provide access to the company’s services, offering 8,000 additional locations that bring the total number across all retailers to 27,000.
The company is planning to expand its delivery service so that is it available seven days per week throughout the year for 80% of the US market by 2020. This is expected to further increase the speed of its network, which is already faster than competitors by at least one day in 25% of delivery lanes. In addition, it will increase differentiation versus peers and may help to increase its market share.
Cost reduction
Plans to reduce costs at FedEx Express include rightsizing the network in order to prepare for future growth. As part of this, it is implementing multi-year modernization programs at two of its largest Express hubs. This is intended to allow it to handle higher volumes more efficiently, which could strengthen its financial prospects.
Lower costs are also expected to be generated from plans to bring SmartPost volumes into the ground network. This will allow the company to improve density and efficiency in last-mile deliveries. This is due to allow FedEx Ground to become a relatively low-cost last-mile provider in the industry over the long run.
Technological change
FedEx is seeking to differentiate itself from sector peers through investing in new technology. This includes advancements in loading, sorting and scanning technologies that are expected to provide real-time data. This is due to maximize the use of rail, improve delivery density and boost efficiency across a range of packages.
Within its Freight segment, the company is seeking to increase the pace of modernization. A key part of this is moving away from paper-based processes, with electronic shipping labels and advanced driver assist systems allowing the company’s staff to work more efficiently. This could lead to an improved service offering, and a market share gain.
Threats
The company’s performance in Asia last quarter was negatively impacted by trade tensions between the U.S. and China. Having grown 10% in 2018, China’s exports have recorded minimal growth so far in 2019. This has contributed to reduced demand for the company’s services across Asia. FedEx’s European growth is also expected to remain subdued, with risks such as disruptions in the auto sector and political uncertainty threatening its outlook. This global slowdown comes at a time when the company’s decision not to renew its contract with Amazon (AMZN, Financial) is expected to act as a headwind.
In response, the company is in the process of simplifying its pricing structure in European markets, while also creating new pricing programs specifically for the Asian market. It is also moving ahead with the integration of TNT Express, an international courier service, which is expected to be completed in fiscal 2020. This will allow interoperability between the Legacy Express and TNT networks in order to offer faster service at a lower cost for customers. Meanwhile, FedEx expects to fully replace the lost volume from the decision to end its Amazon contract by fiscal 2021.
Outlook
In the next fiscal year, FedEx's earnings per share are expected to rise 9.5%. Since the stock has a forward price-earnings ratio of 9.9, it seems to offer good value for money. Having underperformed the S&P 500 by 36% in the last year, FedEx stock is appealing.
Disclosure: the author has no position in any stocks mentioned.
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