Recommendation: BUY Target Price until (05/31/2016): $190 1. Reasons for the Recommendation
I arrived at a buy recommendation based on three key observations. The first is industry performance, in particular the courier & delivery industry. Second is FedEx implementation and goals for the profit improvement program. The third factor explores acquisitions and capital expenditures to improve FedEx Express.
The local courier & delivery service industry is expected to grow at a rate of 3.1% over the next five years. Industry growth is impacted by external technological connectivity and speed. The internet is supplementary toward the growth of e-commerce, a key driver for the industry’s growth. Within the industry, FedEx is a major player second only to the United Parcel Service (UPS) in market shares.1 This point is significant because it places FedEx in a strong position to mirror industry growth. FedEx Ground in the past five years has proven to perform even under deteriorated economic state. One positive result of the financial crisis is the exit of key competitors. In 2009 FedEx acquired half of DHL markets as the competitor exited the United States.2 Similarly, the global courier industry projected growth is positively projected at 3.7% over the next five years. The key external factor that drives growth globally is increase global consumer spending and internet availability in new markets. FedEx Express that operates in more than 220 countries is a major player. However, unlike FedEx Ground that offers lower cost ground shipments, FedEx Express has experience lower earnings as global preference shift towards economy services.
In 2013 FedEx begin implementation of the profit improvement program. The program’s main goals are to drive overall cost down and strengthen business segment cores. Financially, the program set goal is reaching operating profits of $1.6 billion.3 As of 2015, the program is nearing its finalization with
expected benefit returns in the latter of 2015 and 2016. Currently FedEx is on track to reach its goals in reducing cost structures. To support this claim, in the 2015 second quarter earning call, FedEx stated they are exceeding their cost reduction expectations.4 Additionally, part of the profit improvement program includes the voluntary buy-out that involved 3,600 FedEx Express and Service employees. Since 2010, salaries and employee benefits with percent to revenue has declined 4.05%. A potential risk can be observed following past FedEx business restructuring. For example, historical valuation following FedEx 2005 restructuring presented falling numbers in 2006 and 2007.
In reference to global industry performance and position, FedEx Express potential share of the 3.7%5 industry revenue growth can be obtainable by following its current tract. Acquisitions are significant because it allows FedEx to further increase its position in the industry by gaining new market shares. For example, the acquisition of Supaswift (Pty) Ltd. provides FedEx extended knowledge and infrastructure
1 IBISWorld. (2014) IBISWorld Industry Report. Global Courier & Delivery Services.
2 FedEx Corp. (2009). Form 10-K 2009.
3 FedEx Corp. (2014). Form 10-K 2014.
4 FedEx’s (FDX) CEO Fred Smith on Q2 2015 Results
5 IBISWorld. (2014) IBISWorld Industry Report. Global Courier & Delivery Services.
in Southern Africa. In the past five years, acquisitions took place in Brazil, France, and Mexico.6 The impact of these acquisitions meant increased establishment in the global market.
An additional strategy implemented that will begin to become evident is the ongoing efforts to modernize FedEx’s aircraft fleet. The transition to new aircrafts in particular the Boeings 777’s and 767’s will give FedEx fleet fuel efficiency and cut maintenance and repair cost.7 A key external factor for earnings growth going forward for the industry and FedEx is fuel prices. In acquiring new aircrafts, FedEx hopes to establish stability with the volatility of fuel prices.
2. Company Analysis
FedEx is made up of four business segments that focus on delivering goods and services globally and domestically through varieties of time and cost options. The four business segments of FedEx are: FedEx Ground, FedEx Express, FedEx Freight, and FedEx Services.
A primary strength for FedEx is their ground business segments which function in providing domestic services to the entire U.S. and Canada’s population. Its main competency is delivering small-packages weighing less than 150 pounds that caters to residential and businesses. Competitively, FedEx Ground’s advantage comes from its improved low cost structure and effective use of information and automation systems. Implementation that seeks to improve service includes increased daily pickup capacity, expansion of new and existing hubs, relocation, and research in automated sorting technology. As result of the following improvements throughout the segment, FedEx established infrastructure was able to support increase volumes and yields that continual to drive growth. Volume growth reflected in total revenue for FedEx Ground in 2014 grew from 10.57 to 11.6 billion dollars.8
FedEx Ground is also home to a key weakness, which is its heavy reliance on owner operators to conduct its services. The status of owner operators as independent of FedEx Ground is being challenged in numerous lawsuits that remain unresolved. The main criticism of FedEx’s classification is that owner operators should be treated as employees. For FedEx, the impact would mean increase operating cost. The reasoning is with the change in classification from owner operator to employees, labor groups will have greater leverage in organizing. Additionally, if approved, FedEx will be held financially accountable.
Opportunities lie in FedEx’s largest business segment, FedEx Express. The main function of FedEx Express that drives sale is providing international time guaranteed delivery through two pricing option priority and economy. Reports in recent years have indicated shifting global preference towards economy services over priority overall dampening earnings. FedEx Express revenue validates its importance for the company as FedEx continuously aims in improving the segment. Implementation that seeks to improve the segment includes the profit improvement plan in particular the voluntary buy-out program. The voluntary buy-out program that affects FedEx Express and Service aims to reduce cost in selling general
& administrative cost. In establishing lower cost structures, FedEx opens up availability to acquire new
6 FedEx Corp. (2014). Form 10-K 2014.
7 FedEx Corp. (2014). Form 10-K 2014.
8 FedEx Corp. (2014). Form 10-K 2014.
emerging markets. External factors that can drive demand upwards are increases in internet accessibility and growth in e-commerce in developing countries.
Competition in the freight industry is high. The ease of entry into the industry allows for threats of new entrants. FedEx’s third business segment is its freight option which exemplifies this threat. Unlike its ground and express counterparts, FedEx Express market shares are reflective of the freight trucking industry highly competitive environment at 1.5%.9 FedEx Freight provides less than truck load (LTL) freight services to consumers and businesses. The key differentiator that separates FedEx Freight from other FedEx business segments is its capability to deliver packages weighing from 150 to 10,000 pounds.
However, within the freight industry, the service FedEx Freight offer is undifferentiated with other freight companies. As result, the segment is susceptible to changes in price levels set by competitors.
FedEx Services key function is its acting role as the point of interaction between FedEx and the consumers. The function of FedEx Service includes marketing, customer service, information
communication and sales. Supplementary, FedEx Services acts as a support network for the other three business segment. Strength of FedEx Services is its adoption of technology, utilizing mobile and online service to streamline transactions. The significance of the change is its ability to take advantage of growing e-commerce trends; key factor for growth in all transportation services.
Industry Analysis
FedEx four business segments can be further divided into three distinct industries. The first
incorporates both FedEx Express and FedEx Ground is the Courier & Delivery Services Industry. Further division within this industry takes in account of geographical distribution between global and local. The second industry aligns with FedEx Freight operation in the United States is the local freight trucking industry. Lastly, FedEx Services characterizes traits found within the business services industry. The following analysis will explore these three industries and how FedEx relative position within them dictates performance and growth.
Courier & delivery services are made up of an assortment of delivery option from ground to air.
Importance within the industry includes the emphasis on express delivery of high weight value packages.
For FedEx this would include FedEx Express priority service. International service relies upon established transportation frameworks consisting of freight, air, and information technologies. In addition to
transportation constraints, the ability to clear international customs adds to clear entry barrier for new competition. This point identifies the reason for FedEx relative position within the industry. In market shares FedEx is only second to United Parcel Service (UPS). Competition within the industry varies between global and local markets. Opposite of global courier and delivery service, domestic competition is relatively higher as it is easier to obtain the means to operate business at a lower cost. The significance for local competitor is the majority of services allocated towards domestic ground delivery services are 57% of industry revenue.10 One positive result of the financial crisis and a weakened US economy in 2008 was the exit of DHL a key competitor of FedEx within the local courier industry. The result was
9 Rivera, E. (2014). IBISWorld Industry Report 48412. Long-Distance Freight Trucking in the US.
10 Haider, Z. (2015). IBISWorld Industry Report 49222. Couriers & Local Delivery Services in the US.
FedEx gained half of DHL market share.11 The impact of competition exit was evident the following year as FedEx Ground growth increased as customers’ preference for lower-priced ground services grew. As of 2014, FedEx is a major player within the local courier industry holding 26.7% of market share. Second to its main competitor the United Parcel Service (UPS) with 38.7%. FedEx strong position within the industry will allow it to align with the industry positive outlook driven by the growth of e-commerce and information technology advances.
Local freight trucking in the United States is divided by transportation options categorized by weight.
The first is truckload freight defined by the industry as the shipment of product weighting more than 10,000 pounds. FedEx Freight operates within the second weight transport category of less than truck load (LTL) freight, which is defined as product shipment weighting from 150 to 10,000 pounds. Products weighing in less than 150 pounds are not included within the freight trucking industry. Competition in freight trucking is high as market shares are low. Competition position is the result of the relative ease of entering into the industry. As result, there is a dense amount of owner operators. Although increase competition drives prices downward, the freight trucking industry outlook is positive. However growth within the industry is highly dependent upon spending increase.
The business service center industry operates by offering a variety of services and good for customers and businesses. These offerings include copying and printing, postal services, and retail. The key market segment for the industry is small businesses accounting for 60% of industry revenue12. The main service that drives sales is copying service. Competition in the business service industry is similar to a lesser extent to freight service with a highly competitive environment. Again, ease of entry is the determining factor for competition position. Although both freight trucking and business service industry are highly competitive, the business service industry outlook is negative. Key factors that affect industry
performance is the rapid pace information can be sent between individual and groups. Also, advances in independent printing products have cut into the industry’s main driver of revenue copying services.
Industry five year actions will be continual consolidation.
11 FedEx Corp. (2009). Form 10-K 2009.
12 McKenna, F. (2014). IBISWorld Industry Report 56143. Business Service Centers in the US.
Appendix: Inputs into valuation using multiples
* Analyst's own calculations. Source of basic data: company's 10-K; Yahoo! Finance
2009 2010 2011 2012 2013 2014 2015f 2016f 2017f
Stock price 55.43 83.49 93.64 89.14 96.34 144.16 168.3307 189.8771 179.9718
EPS (basic) 0.31 3.78 4.61 6.44 4.95 6.82 7.47 7.95 8.50
Sales 35497.00 34734.00 39304.00 42680.00 44287.00 45567.00 46979.58 48576.88 50228.5 Sales per share (basic) 113.77 111.33 124.77 135.49 140.59 148.43 153.03 158.23 163.61
P/E 22.2 15.2 14.7 27.7 21.9 21.9 23.65 22.85
P/S 0.8 0.6 0.7 1 1.1 1.1 1.1 1.2 1.1
