A transformation in progress with FedEx, get in early or wait for the results

FDX - FedEx Corporation

FedEx is a premier global transport and logistics company. The company delivers 14 million packages a day in 220 countries and territories worldwide. It handles over one million packages at its world hub, every day. FedEx has an unmatched global network and it practically delivers to every address in the U.S. 

FedEx operates through its many operating companies and offers a broad portfolio of transportation, e-commerce and business services to meet the needs of its customers. These companies are FedEx Express, FedEx Ground, FedEx Freight, FedEx Services, FedEx Logistics, and FedEx Office. FedEx Express (54% of 2019 revenue), FedEx Ground (29%), FedEx Freight (11%) and FedEx Services (2%), and other (4%) are its reporting segments. The FedEx Logistics operating results are included in the other segment. FedEx owns a fleet of 686 aircraft and more than 180,000 vehicles and runs more than 5,000 operating facilities.

Investment Data

Revenue Growth & Market Exposure

FedEx revenues have grown at a rate of 8% CAGR over the last five years. FedEx has a long history dating back to 1973 and customers trust FedEx for its flexible and innovative solutions. The company has developed a strong reputation for safety and timely delivery of customer packages. Given its diversified lines of businesses, FedEx is in a good position to cross-sell. The company offers a strong portfolio of residential services as well.

For the convenience of its customers, the company has built a FedEx retail convenience network that offers nearly 55,000 U.S. locations from where customers can drop off or pick up their packages. The company has tie-ups with leading retail brands like Walgreens, Kroger, and Albertsons and plans to add more such locations within Dollar General and Walmart stores in the U.S. Its convenience retail network has grown to over 14,000 locations in FY2020. Its FedEx Ground has resulted in more than 72% of the volume being delivered in two days or less. The company has also been investing aggressively in technology and has launched a new digital shipping tool for small business customers across 54 countries in seven languages.

FedEx stands to benefit from an improvement in its express hubs, integration with TNT, modernization of its aircraft fleet, etc. The company is transitioning to cloud-based systems from traditional mainframe computing systems. Given its large scale, the company is better positioned to optimize costs. In the past year, FedEx has generated more than 12,000 e-commerce opportunities with more than 60% of the traffic being international export volume and added more than 3,400 customer wins with nearly half of these wins being new customer relationships. The company is working on improving FedEx Express margins, e-commerce shipments, and completing TNT integration. It is also focusing on several initiatives such as the FedEx SameDay Bot Roxo, sensor-based shipping, and new digital services.

FedEx had already lowered its fiscal 2020 revenue outlook due to increased trade tensions and weakening of global economic conditions. The global pandemic outbreak has further heightened issues around global trade and commerce. The total air cargo capacity from Mainland China declined by 40% YoY, from early February to March. The implementation of the travel ban between countries has affected air freight capacity as most of the transportation is done through passenger flights. FedEx has been adjusting its network to reach its customers faster, amidst lockdown of some areas and enhanced border controls.

Dividends

FedEx is a Dividend Achiever and sports an annual dividend yield of 1.9% and a high payout ratio of 100%. It is known for its consistent quarterly dividend payouts. FedEx has been paying regular quarterly dividends for more than 19 years and has also increased them every year since 2002. FedEx has returned over $14 billion to shareholders through repurchases and dividends, from FY14 through FY19. The company last raised its dividend by a whopping 30% and has an impressive 5-year dividend growth rate of 30% CAGR. Earnings have grown at a rate of 20% CAGR in the last decade.

The company has a target of increasing its EPS by 10%-15% per annum. Its integration with TNT is progressing well and the company is on track to deliver important milestones by the end of the fiscal year. European revenues now account for ~40% of FedEx international revenues, compared to just 20% earlier. FedEx is looking at driving significant earnings growth and improving margins, cash flows, and shareholder returns through significant long term investments. It is also implementing additional cost reduction initiatives and continues to make strategic investments to improve its capabilities and efficiency, which will drive future earnings growth.

U.S. e-commerce is estimated to account for more than 90% of total market volume growth through fiscal 2026, and FedEx is expected to address ~56% of that growth. The consumer sector is a potential opportunity for FedEx and has been driving its B2C growth in Europe. However, the current scenario has led to muted growth in this segment. The Freight segment of FedEx’s European business has been under significant pressure. The company’s sales pipeline momentum, however, remains at a high pace across all segments. The rapid growth of global e-commerce acts as a huge tailwind for the company and FedEx is well-positioned to gain as the premier global transport and logistics company.

Competition

The express package and freight markets are highly competitive. Superior global networks, portfolio of solutions and efficient transportation and logistical means differentiate FedEx from its competitors. United Parcel Service Inc. is its most significant competitor in the U.S. Other international competitors include DHL, UPS, DPD, General Logistics Systems, foreign postal authorities, passenger airlines, air freight forwarders, regional carriers, and all-cargo airlines. The company also faces intense competition from Amazon.com. A majority of FedEx Express’s international competitors are either government-owned or controlled.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
NYSE:UPSUPSUnited Parcel Service Inc.IndustrialsIntegrated Freight & Logistics0.61118.3583.3323.9724.814.940.03413.410.817844.040.105887Consumable - DiscretionaryNONONONOUSA1
NYSE:FDXFDXFedEx CorporationIndustrialsIntegrated Freight & Logistics0.65165.0443.2333.6824.814.900.01581.580.530642.600.2102105Consumable - DiscretionaryYESYESNONOUSA1
NASDAQ:EXPDEXPDExpeditors International of Washington Inc.IndustrialsIntegrated Freight & Logistics0.6080.1913.3524.2524.813.310.01301.300.314221.040.090286Consumable - DiscretionaryYESYESYESNOUSA1
NASDAQ:CHRWCHRWCH Robinson Worldwide Inc.IndustrialsIntegrated Freight & Logistics0.5886.0711.5923.9424.813.600.02372.370.566742.040.073076Consumable - DiscretionaryNOYESNONOUSA1

Bottom Line

FedEx business should continue to benefit once the economic environment stabilizes. It is favourably placed to flex its network and meet customer needs as the demand for its services rebound after the coronavirus pandemic and slowdown in global trade subsides. FedEx’s investment in the complete overhaul of its network and new technology will drive efficiency and profitability, reduce costs, and maximize capacity utilization. Given the company’s long history and experience in weathering global crisis and a shareholder-friendly nature, it should continue its dividend growth streak in the future as well.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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