What’s next for air freight shares?
In real life and the capital markets, the mathematics of exponential curves is one of my obsessive passions. I remember when the Cargo Village in Garhoud was built to handle 150,000 tonnes of cargo in the early 1990s, when Emirates airline first began its viral global network growth. Living in New York, I loved to board EK 001 from Heathrow, since all those I loved lived in Dubai — and the Emirates waiting lounge was the first whiff of home in the Britannic-sceptered isle. The Cargo Village is now the Mega Cargo Terminal. Emirates SkyCargo handles 2.1 million tonnes of airfreight, with almost Dh11 billion in revenues. This has got to be the most stunning exponential growth curve in the history of global aviation — and I mentally value a public exit multiple for such air freight growth colossus from the Middle East. Nobrainer cliché of the millennium? If Emirates SkyCargo is ever floated in an IPO, it could be a money making bonanza since it leverages off one of history’s great cargo capacity expansion/route network economies of scale right here in Dubai. So the freighter fleet moves to Dubai World Central but the belly deck stays at Dubai International. If only Emirates SkyCargo was a listed growth stock; if only!
Air freight has fascinated me since I was a young chap and visited Memphis, the world’s largest cargo airport and bigger than Shanghai/ Pudong, Amsterdam/Schipol, Incheon and Hong Kong. Memphis is also the hometown of hedge fund legend Paul Tudor Jones and Dolly Parton, who also impressed the teenager moi to no end in the Roaring Eighties. As Godzilla said, size matters!
FedEx, founded by legendary Yalie Fred Smith, is the world’s second-largest parcel delivery/air freight business. The time to buy the shares was in the 85-95 range in spring 2013 but I was unable to see the impact of the end to Europe’s debt crisis on air freight demand. Strangely, apart from the Gulf and West Europe, air freight growth is still mediocre, with concerns that range from China’s financial distress/export slowdown to Brazil’s weakness to Turkey and Thailand’s political crises. So would I buy FedEx at 135 now? Absolutely not. Management missed both earnings and revenue in the last quarter, with a $130 million revenue miss and EPS at only 1.33 a share, below the consensus 1.45. Sure, the Arctic weather in the US was the culprit, as it was for McDonald’s, Ford, CSX, etc. Yet FedEx downgraded its profit forecast too. So earnings will be $6.5 EPS in 2014 tops. This means FedEx now trades at 20.8 times earnings at a time when revenue growth will be barely four per cent. This is far too expensive. This will not last. Wall Street will punish FedEx, hopefully down to the $120 level, my target buy price.
As an investor, I cannot ignore a company that is a global brand name and leveraged to both accelerating growth in US/Europe, the global penetration of e-commerce and wealth creation/connectivity in the emerging markets. There are specific catalysts that I believe will ignite a 20 to 25 per cent rally in FedEx, though only after it falls to $120 or even $125 this winter. One, FedEx will begin to show higher margins as costs fall and the planned $1.7 billion profit boost begins to show results. Two, the global airfreight market growth momentum will rise (Iata data confirms the Gulf air cargo growth rate is 16 per cent. Voila!). Three, FedEx will accelerate its share buyback programme to $3 billion a quarter hopefully. Four, Wall Street will begin to price $9 a share in 2015. Five, ground and freight would stabilise as higher airfreight demand cuts global excess capacity. Six, the product mix will shift again from international economy to priority. Then and only then can FedEx move to $160 a share. Fred Smith, raise the dividend! Or FedEx will drip drip in a Chinese water torture range trade until the end of time.