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Thesis
FedEx (NYSE:FDX) is a world-renowned logistic company that provides transportation, e-commerce, and business services. Its business segments include FedEx Express, FedEx Ground and FedEx Freight. FedEx Services and FedEx Office are also included.
FedEx has done wellThe latest Q3 2022 earnings call reveals the top-line results. The total revenue reached $23.6 billion, which is a 10% YoY increase.
Despite the positive Q3 2022 results there are several factors that could hinder the company’s growth. These factors include COVID’s lingering effects, tight labor market, ongoing conflict between Russia & Ukraine, supply chains disruptions, and inflationary pressure.
FedEx’s main competitors are United Parcel Service, (UPS), and Amazon (AMZN).
1. The pandemic’s lingering effects
Due to the labor shortages and rising labor costs, the labor market was very competitive during the pandemic. The lack of a labor force has caused delays and disruptions in logistics. However, the omicron situation is improving and countries and workforces are gradually picking up their pace, so there is some hope that the problem can be solved.
Despite the ease in the ‘physical labor market’ and the availability of a labor pool to hire labor, wage pressure will remain a problem in the medium-term. According to the latest earnings call, the market labor impact was estimated at $210 millions year-over-year. We hope that the tight labor market situation will improve and that it has a positive impact on the company’s operations.
Due to the increasing number of COVID cases in China there have been reintroduced restrictions in many parts of China. This has caused delivery disruptions and in some cases, a temporary suspension for the company. China’s negative impact on the global supply chain will result in a reduction of actual supply. This will have an impact on the global supply chain and will also impact Asia.
The company sees some opportunities. – The European region can improve its efficiency and top line. The FedEx ground business in North America must use the revenue growth to improve margins.
There are some changes that could accelerate the pace of logistic innovation using robotics and advanced computations. FedEx has a long history of testing autonomous vehicles, and plans to continue this trend. We cannot predict the outcome of these future changes but FedEx seems to be on the right track to seize the opportunity.
2. The war has created a more difficult business environment
The war will be a disaster for the world’s economic system. It has also weakened the global supply chains and caused an increase in oil prices. Despite the fact that the company suspended all services in Ukraine and Russia and stated that there is no profit impact, there are still inevitable indirect effects on the business due to global economic interdependence.
Energy price, which accounts for approximately 5% of operating expenses, is one of the costs of the company’s business. The rise in energy prices can be attributed to many factors, including an increase in demand after the pandemic, the Biden administration’s domestic policy on energy, and the ongoing Russia/Ukraine war.
The company reviews its fuel surcharge every other month to maintain its base shipping rate and adjust the surcharge to compensate for the increased fuel price. This is a common practice that allows companies to offer comprehensive services and support competitive delivery costs. From a consumer’s perspective, this increases in shipping costs is caused by the consumer.
Inflationary pressure and higher interest rates (future) are causing consumer confidence to drop. Sticky wage growth will cause lower GDP and lower spending, as well as a higher price rise for goods. These factors, together with the pressured sales growth and concurrent margin compression caused by residual pandemic effects in labor force and energy costs, will make it a difficult environment for the company.
3. Despite the fact that e-commerce has seen a greater revenue growth, there is still a limited margin growth
The COVID-driven ecommerce sales growth has allowed logistics businesses to accelerate their sales growth for years before it was anticipated. We see margin growth of 3% YoY in 2021-2022. This raises serious questions about whether the huge logistics companies are benefiting from e-commerce growth. The margin and cash flow growth are limited by competition among existing companies, an operation model that depends on people and fuels and threats from new players (for example, Amazon’s unmanned logistics).
Valuation & opinion
This is my FedEx price range
Author’s financial model (Author)
FedEx is a well-known name in the industry and has developed its niche market over the years. FedEx announced last year a $5 billion share-buyback program (10% of current market cap or approximately 2% per annum on a 5-year plan). With a dividend yield of 1.5%, the stockholders get a reasonable 3.5% annual return. Despite the difficult macro-economic conditions and low cash flow growth expectations, I consider the price at its full value, but it is not attractive to buy.
Long-term, I find it interesting to watch the company’s plans for drone delivery and autonomous vehicles. This will allow us to see whether the company can take advantage of the opportunities and improve our process efficiency. Long-term fundamentals aside, I see this capitalization as a mandate to compete against existing competitors and new entrants like Amazon.