Transport giant FedEx offers sound value
RETAIL e-commerce sales worldwide have grown by 20 percent annually since 2013, with no signs of abating over the next few years.
E-commerce now represents 13 percent of total global retail sales and is projected to rise steadily going forward as the adoption of convenient online shopping technology increases. This growth creates opportunity – parcels still have to be delivered.
FedEx is one of the world’s largest transportation companies with a global market share of 30 percent and a market capitalisation of $45.2 billion (R624.3bn). Its annual revenue of $65.5bn is approximately a fifth of South Africa’s annual gross domestic product.
The group estimates that 80 percent of people in the US are within eight kilometres of a FedEx hold location. The company focuses on small-package and freight delivery, e-commerce and business services in more than 220 countries and territories.
The company’s segments include FedEx Express, TNT Express, FedEx Ground, FedEx Freight and FedEx Services. More than 66 percent of its sales are from the US.
FedEx Express operates the world’s largest cargo air fleet with more than 650 aircraft, and is the largest operator of the Airbus A300. To put this into perspective, Emirates and Qatar airlines have a combined fleet size of 490 aircraft. South African Airways barely tips the scale with 47 aircraft.
FedEx has a high exposure to air cargo (55 percent of sales), which should benefit from solid structural e-retail growth potential in the long term.
Peaking at $275 a share just under a year ago, FedEx has declined by 37 percent and is currently trading at $173 a share.
Shortly after announcing the surprise retirement of its Express segment chief executive during December 2018, FedEx cut its full-year 2019 earnings guidance by 8 percent.
The weak outlook is primarily due to slowing global trade and delays relating to the integration of TNT Express, a Europe-based company FedEx acquired in 2016. Concerns relating to the potential threat from Amazon’s expanding delivery capability further strained FedEx’s share price.
Amazon now has 50 aircraft with the primary purpose of internalising most of its own deliveries. The e-retail giant indicated that it does not intend to replace FedEx or UPS, or even the US Postal Service, but rather to supplement them. Analysts estimate that Amazon accounts for only 3 percent of FedEx’s revenue.
Moreover, FedEx and United Parcel Service have both recently announced an above-inflation price increase of 5 percent for their respective ground operations. If both companies perceived the Amazon threat as significant they might not have displayed this pricing power.
FedEx benefits from strong brand recognition and a leading global market position. It has a strong balance sheet which provides financial flexibility.
The company’s capital efficiency is improving as it shifts capital expenditure into its higher-margin ground segment. Its largely automated network of ground facilities gives it an edge in handling e-commerce volumes and requires less incremental investment in future. These productivity gains, disciplined pricing and cost-control strategies, enable FedEx to succeed in the rapidly growing e-commerce segment even as global economic growth is slowing.
The recent sell-off has resulted in an undemanding price-to-earnings multiple of 9.5 times. At current levels FedEx offers sound relative value.
Frants Preis CFA is a portfolio manager at Vega Asset Management based in Pretoria. FedEx shares are owned on behalf of clients.