FDX - FedEx

[rockket]

Curious to get members' thoughts here.

 

Solid management, formidable moat, taking share away from UPS, and currently undergoing a huge restructuring plan concordant with a decline in CapEx that should see big impacts on FCF in about 2015. Margin improvements coming from shifts towards its higher margin ground business and increased operating leverage.

 

All in all ROIC should increase and FCF should grow faster than EPS, which should be ~15% per year for the next few years. Big upside with the global economy's improvement as well, as FDX and UPS are levered to the economic recovery.

 

I'd argue that the multiple should be higher here (currently ~14x forward) - and it certainly will be/could be if management can execute on its restructuring plan as proposed.

[blainehodder]

Hmmm...  Doesn't seem very cheap looking at the historical financials...

 

http://www.gurufocus.com/financials.php?symbol=FDX

 

I know nothing about the restructuring, but is a moat in a medicore return business worth much?  I much prefer to play in the cheap field to give me a handicap.

[rockket]

UPS' ROIC is ~20%, and FedEx is moving towards that level, though that'll take years to achieve. More important is that RONIC is well above its current ~10% ROIC. Assuming that volumes increase (likely short of another recession - even then, top line is somewhat resilient) and the shift towards ground continues, ROIC will grow; a successful restructuring should do so even further.

 

On top of that you have growth.

 

I guess my thought is that FedEx is moving towards a highly FCF generative and increasing ROIC state, with arguably better market position than UPS, and deserves higher valuation/should see multiples expand to match that.

 

Another bit about the UPS/FedEx duopoly is that it's pretty clear any type of pricing war won't make sense (DHL bowed out a few years ago as it couldn't compete), and we should see a shift towards profit maximization as a result, including pricing increases.

 

 

 

[Ross812]

I thought FedEx lost a portion of their USPS contract carrier service to UPS and the commercial airline industry this year? FedEx operates more as a transportation conglomerate than a true transportation company like UPS. If you send two packages to the same person. One three day ground on Monday, the second next day air on Wednesday they will be delivered by two different trucks on to the same address on Thursday. There are a lot of inefficiencies that can be remedied at FedEx, but their network is just not as big as UPS's and there is no way they can be as efficient because of this fact.

 

When UPS comes to your neighborhood, they deliver 20 packages. When FedEx comes to your neighborhood, Express delivers 2 packages and freight delivers 8. Even if the services were combined, the cost of delivering 10 packages or 20 is same and UPS is still more profitable. FedEx is trying to catch up to UPS's efficiency while UPS is using FCF to fund expansion, which in the end will further widen their moat as their network grows.

 

That being said, both are good businesses and both, in my opinion, are overpriced when considering their future growth rates. FedEx and UPS rise and decline with the overall economy and can be had very cheaply (for a business of their quality) when the broader market declines. 

[Jurgis]

Sorry, Viking, but I'm gonna bump the old Fedex thread.

Probably Sanjeev should just merge the two threads.

 

I've looked at FDX on and off. It's been almost perpetual member of Barron's "World's Best CEOs" list.

It is interesting and attractive somewhat, but I'm not comfortable with the debt and lack of FCF.

https://www.sec.gov/Archives/edgar/data/1048911/000156459018006410/fdx-10q_20180228.htm

Maybe it's similar to my reservations about UHAL: I'm not sure if the cash is spent wisely.

 

 

 

[Viking]

Jurgis, not a problem. I have copied over my note and deleted my comment from the previous thread. :-)

 

I am looking for world class companies to add to my portfolio. The challenge is they rarely get cheap enough so I never make the purchase. I think a case can be made to purchase the best companies at a fair price versus always waiting for a rock bottom price, which may never come. The goal is to build a stable of best in class companies that one is comfortable holding for the long term.

 

FexEx looks to me to be a solid candidate. The company has an amazing long term track record of growth, being well managed and being very shareholder friendly. The company is front and center in the middle of the current boom: as more retailing is done direct to consumer more goods will need to be shipped. Their recent purchase of TNT is about 6 quarters away from being fully digested; when this happens we will see a nice acceleration in total profits. The current PE multiple (to 2018 earnings) is about 13. Not crazy cheap; but what I am learnings over the years is better to pay a fair price for a great business and then sit in the weeds and let management do their thing and reap the reward for many years after.

 

DoctorRX just published a great FDX article on Seeking Alpha: https://seekingalpha.com/article/4184838-fedex-buying-long-haul-negative-newsflow

[Spekulatius]

I thought in FDX is a reasonable idea. Good company at a reasonable price. I have owned UPS in the past, but sold the position to very trade war and teamster concerns but now I reconsider, I think FDX is a better choice and I believe the ROA for FDX and UPS will converge over time.p, which benefits FDX.

[peterHK]

They've done a lot in the past few years to set themselves up well for the future.

 

The reason they have no FCF is they're reinvesting everything to expand capacity as more and more things are shipped between businesses and consumers. Their ecommerce business is relatively small vs. UPS, but it's not particularly profitable. An increase in USPS rates, as Trump has hinted at, would benefit this side of the business.

 

They've also reduced their pension liability which was another issue on the balance sheet.

 

Leverage is quite reasonable at 2x EBITDA or so net, and I doubt the CEO who owns billions in stock is going to do something that threatens his business.

[Jurgis]

They've also reduced their pension liability which was another issue on the balance sheet.

 

Yeah, I thought I remembered pension liability being an issue to me and saw lowish number and was like "do I remember this wrong". I should take more notes.  8) Edit2: pension liability cleanup is a positive in my view.

 

So I guess the consensus is that reinvesting into business is justified although I'm not sure it's showing up in revenues numbers.

 

Anyone wants to give opinion FDX or UHAL?  8) (Maybe apples to oranges, but  8))

[peterHK]

They've also reduced their pension liability which was another issue on the balance sheet.

 

Yeah, I thought I remembered pension liability being an issue to me and saw lowish number and was like "do I remember this wrong". I should take more notes.  8) Edit2: pension liability cleanup is a positive in my view.

 

So I guess the consensus is that reinvesting into business is justified although I'm not sure it's showing up in revenues numbers.

 

Anyone wants to give opinion FDX or UHAL?  8) (Maybe apples to oranges, but  8))

 

The two aren't really similar businesses. UHAL is reinvesting in storage, which takes time to build and get occupancy, so it probably hasn't shown up in their reported financials yet. I haven't looked at them in a while so I don't know for sure.

 

FDX's investments are just part of growth; it's a capex intensive business.

 

Where the real opportunity is for FDX is getting TNT more efficient, which should drive ~$20 of EPS or so in 2020, if the analyst community is to be believed. I think this is at peakish earnings, so I don't know how full a multiple I'd put on that.

[Jurgis]

To incense anti-AMZN crowd, I should bring up the AMZN specter: they are trying to build out both long-haul and last mile delivery. How much this can hit FDX?  8)

[Spekulatius]

To incense anti-AMZN crowd, I should bring up the AMZN specter: they are trying to build out both long-haul and last mile delivery. How much this can hit FDX?  8)

 

The tariff war which might or might not be enduring is a much larger concern. UPS and FDX are major beneficiaries of international trade.

[Jurgis]

I took a look at https://www.sec.gov/Archives/edgar/data/1048911/000095012317006152/fdx-10k_20170531.htm

International is ~40% of revenue. Tough to say how much of that would be impacted by tariffs.

[Viking]

Started a small position today. Lower oil prices should ge a nice tailwind. BAC CEO recently said consumer spending in US is up 9% year over year in October (70% of US economy).

 

I need to do a lot more reading but looks like an interesting opportunity at $225. The comments attached to the article below are quite good.

 

https://seekingalpha.com/article/4221263-simply-cheap-ignore-fedex-due-diligence-dive

[Spekulatius]

At $185 currently, or about 10x forward earnings (assuming the forecasts materialize), the stock certainly looks cheap. It looks to me like Mr Market punishes the transports as sensitive to the economy and particular FDX due to the change in leadership that came without prior notice. the latter could mean issues that have not transpired yet. Overall, it seems to me like a company with a lot of tailwinds that can grow in the high single digits and probably is underearning a bit due to the TNT integration, which takes time. I haven’t heard much about the shift from 5 days/week to six days/delivery, but it could be a gamechange in terms of utilization.  I have been buyer of the stock recently.

[Viking]

At $185 currently, or about 10x forward earnings (assuming the forecasts materialize), the stock certainly looks cheap. It looks to me like Mr Market punishes the transports as sensitive to the economy and particular FDX due to the change in leadership that came without prior notice. the latter could mean issues that have not transpired yet. Overall, it seems to me like a company with a lot of tailwinds that can grow in the high single digits and probably is underearning a bit due to the TNT integration, which takes time. I haven’t heard much about the shift from 5 days/week to six days/delivery, but it could be a gamechange in terms of utilization.  I have been buyer of the stock recently.

 

Spekulatius, i will be paying close attention to FDX when they release earnings this week. Speculation is the change in leadership may signal a miss in the upcoming release (perhaps linked to the TNT integration turnaround not materializing as previously communicated?). We will find out in a few days. Mr. Market may serve up a nice fat pitch right down the middle of the plate :-) We can only hope.

[DCG]

Anyone looking at Fedex? Stock appears like it's pretty cheap.

[gjangal]

it does appear cheap compared to UPS and it’s own historical valuations. I think the amazon logistics threat is overblown for Fedex. They are maybe 3 or 4% of revenue.

 

I believe omnichannel retail could be a tailwind for the company. Unit growth and pricing also will help in the future. Relatively cheap compared to index and peers

 

It’s not a home run scenario but a low double digit return seems possible.

[dwy000]

it does appear cheap compared to UPS and it’s own historical valuations. I think the amazon logistics threat is overblown for Fedex. They are maybe 3 or 4% of revenue.

 

I believe omnichannel retail could be a tailwind for the company. Unit growth and pricing also will help in the future. Relatively cheap compared to index and peers

 

It’s not a home run scenario but a low double digit return seems possible.

 

I suspect the Amazon threat is less about the loss of them as a customer as it is having them as a direct competitor.

[gjangal]

it does appear cheap compared to UPS and it’s own historical valuations. I think the amazon logistics threat is overblown for Fedex. They are maybe 3 or 4% of revenue.

 

I believe omnichannel retail could be a tailwind for the company. Unit growth and pricing also will help in the future. Relatively cheap compared to index and peers

 

It’s not a home run scenario but a low double digit return seems possible.

 

I suspect the Amazon threat is less about the loss of them as a customer as it is having them as a direct competitor.

 

This is a good point, i wasn’t thinking in those lines. It’s a credible threat, that too one without much regulation like pharma. I suspect they will have to rationalize their costs if they start losing incremental market share. Might take a few years to play out though

[Castanza]

I have a bit of an insiders perspective here. I currently work in the "industry" on the tech side of things. But in the past I worked at UPS as a driver (paid my way through college). Now I can't promise all of this information will be relevant or unbiased in anyway shape or form, but I will do my best to give my opinion on the situation.

 

UPS and FedEx are both great companies in the logistics industry. FedEx was founded by a former UPS official (I'm sure most of you know this). However they really are completely different in how they operate and function. This leads to advantages and disadvantages on both sides.

 

UPS is a very streamline company. Their ground and air services all run through the same network meaning their ground drivers deliver Next Day Air packages while delivering ground. This is an advantage because it allows fewer drivers to deliver their total ground volume. This can be a disadvantage though when it gets to busy season and their systems get bogged down. This is an ongoing issue at UPS and is something they are constantly addressing through upgrades.

 

UPS employees are also all under the same umbrella. So management down to the lows of the low dock workers are all under the same supervision. With the exception of UPS Freight who has their "own" management. But if you go up high enough they to are under that supervision.

 

FedEx on the other hand has two separate classes of drivers. One that deals exclusively in Express (Same as UPS air) and another that delivers ground pickups. Now, when seasons get slow this becomes a strain on their efficiency because they are sending out driver with partially full trucks and driving the same miles. If you haven't figured it out by now the logistics industry boils down to one metric. (Stops per mile). But on the flip side of this when times get busy, FedEx has an easier time absorbing high growth in volume because they have packages running through separate systems. Drivers don't have to break off route (like UPS drivers) to meet the time commit for an air package way out in the boonies. They simply "drive in trace."

 

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Let's talk pay, operating costs etc.

 

UPS pays their ground drivers $36.25/hr. Their pay progression is 4 years (19.50, 21.00, 25.00 36.25). It gets better  :D. Overtime is paid as time and a half on anything over 8 hours in a single day. Drivers recognize this rule and can try to use it to their advantage to "milk the system." within scope of not getting fired for poor performance. I'll put it this way. When I hit top rate as a driver I made 92k that year.

 

UPS also has really good benefits. I'm talking the best I've ever seen. Teamcare is the name. You know this is expensive for the company.

 

UPS also has a pension plan which is very costly and imo unsustainable. This is becoming a major issue and will continue to be one down the road. I talked to a driver who retired while I was a driver. His pension was going to be 55k a year. UPS does not have a matching 401k or any other savings plans. I believe some management has stock option plans and they also offer employees a 5% discount on company stock at the lowest price of the year. (Yes I took advantage of this).

 

Not sure how accurate this number is but I was talking to a UPS big wig who came to visit our center and he told me that as soon as a driver punches in on the clock it essentially costs the company $325 between insurance and other "costs."

 

Feeder drivers (not UPS freight, but dedicated ground pickup semi drivers) make well over 100k a year with similar benefits and pension. Don't know their hourly wage, but I've see their gross pay from several employees I knew. And they all work consistent hours.

 

UPS Pays and leases their vehicles and they also pay for the fuel. I averaged 120-150 miles a day as a driver in a truck that got 6mpg. Most are gas now.

 

UPS is a Union (Teamsters)

 

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FedEx (Mind you this is from knowing FedEx drivers.)

 

The way FedEx ground works is the routes are contracted out. From what I understand is FedEx "sells" an area to someone (Think garbage routes) and they are responsible for hiring drivers, leasing trucks, etc. This cost goes back through FedEx though as they are ultimately responsible for paying employees. Now employees at Fedex make far less than at UPS as they are non-union.

 

FedEx ground drivers make around $16-$20 top rate.

 

FedEx Express drivers can make up to $26ish.

 

The difference between these is FedEx ground is contracted out while Express is not. This makes it difficult to figure out how much they are costing the company.

 

FedEx ground is really weird. I knew guys who had to pay for their own fuel, vehicle maintenance and who didn't have insurance. But then there were other guys who didn't have to pay for any of that. I thin it varies based on the owner of the area.

 

Express drivers on the other hand don't have to pay for vehicles fuel etc. They also get insurance and have a matching 401k. No pension though. Often I remember talking with express drivers and they basically told me ground is like its own company. They never worked with or met any ground drivers etc. Just seemed odd.

 

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Employee perception, Customer Perception, Standards

 

UPS to put it nicely was the worst environment I've ever worked in. Employees were Union while management wasn't). This created all kinds of tension in the workplace. I've seen fist fights etc, and its all over the place. Go to browncafe and check it out.

 

UPS drivers are held to extreme standards when it comes to driving (yes there are exceptions). Drivers are well compensated and are expected to perform their job to a high degree. Management would come out and secretly follow you to make sure you're being productive and following safe work methods. They had a tier of escalation to lose your job and it wasn't that hard. (verbal warning, warning letter, fired if within a 4 month period ). And it could be something simple like not tucking your mirror at stop, or not putting your flashers on, or not backing firs so it's easier/safer to leave etc. UPS treated the smallest thing (tree branch scratches) with the utmost importance. This for the most part creates a very safe work force. That's why UPS is by far the safest logistics company.

 

UPS has telematics which track EVERYTHING. I'm talking if you're wearing your seat belt, using the handrail when you exit, driving with the bulk door open, how fast you were going, if you backed to your driver side and how far you backed etc. They knew when you stopped to take a piss in the woods.

 

ORION (route finding software) Absolutely terrible and UPS was robbed by purchasing this. The system does not work in saving miles. Often I would just deliver stuff how I saw fit and 9/10 would be the estimated building ETA and miles by a long shot. But because they purchased this they really began hammering it and forced drivers to follow it. This is costing the company more money but they are too prideful to let it go because they spend millions on it. When being forced to follow it, I worked longer hours and often drove more miles as the system couldn't account for every variable which resulted in many service failures etc.

 

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FedEx has almost no standards, at least in their ground department. I often saw drivers not wearing seat belts, bulk head door open, "nosing" into driveways etc. I've also seen them have "accidents" hit signs etc and just drive away. Now how this affects they company in terms of cost? No idea. They probably get away with a lot of costs haha.

 

Not sure if FedEx uses a route building software.

 

 

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Customer perception - UPS is hands down viewed in a better light (at least in the US). Customers were always complaining about FedEx and how they didn't show up for pickups, didn't meet their commit time etc. Businesses really do trust UPS to get it done and this can be reflected in our price. UPS charges a handsome premium and businesses still pay it. UPS drivers are required (for the most part) to be clean cut, have clean uniforms, etc. They have gotten laxed with standards over the past few years but they do run a tight ship. Shoes must be polished, only mustaches (cant extend below corner of mouth), no long hair, etc. This does have an affect on customer perception as it helps them feel like they are getting a constant service. And the ladies love them shorts  ;)

 

 

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Lets talk markets and Amazon

 

FedEx dominated international shipping. That is their bread and butter. However this leaves them far more exposed to tariffs than UPS.

 

UPS dominates ground in the US hands down. They are doing a good job at leveraging their services and marketing to new customers. They have several small business initiatives but they really focus on getting large contracts with companies like Pet Smart, Target, Wal-Mart, Pottery Barn etc. When I left (just over a year ago) They were really pushing getting into the after market auto parts industry as they saw this as one of the fastest growing industries. I can't tell you how many leaf spring packs I delivered.

 

Amazon and what it means to UPS and FedEx. Basically a big LOL. Amazon packages are used to fill empty volume in trucks which aren't completely full with items from factories, businesses, machine shops, etc. It's basically the cinnamon you sprinkle on top of the cream cheese you put on your bagel. I believe volume is in the 4-6% range. We often made pennies on the dollar delivering Amazon boxes and if a second attempt had to be made you were losing money for that package. I don't have details on contract pricing but I'm going to assume UPS was charging Amazon a decent sum. I do know that UPS is adjusting their pricing to "more effectively" charge Amazon as they were notorious for poorly packaging items or putting small items in large boxes, mislabeling weights etc. Well this was cutting into our profits.

 

This is essentially the same for FedEx.

 

Long story short, residential deliveries are very little profit. They are used to fill volume gaps in our package cars and basically put a little extra cheese on burgers. UPS and FedEx want to ship heavy and they want to ship in bulk. This is most effective at businesses. You do get furniture and say cleaning supplies for some homes which I'm sure are good profit.

 

At the end of the day UPS FedEx and Amazon are in completely different markets. Amazon is not focused on manufacturing or machine shops. They want to deliver products from their website to homes. Drivers in minivans will not be able to go to the local factory and pickup 40 boxes of hardware. So until you see Amazon begin picking up at locations like this I would not be worried about them at all.

 

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Investment wise. I like both FedEx and UPS. I like UPS because of their strong presence in the US and how they are less reliant on international shipping (which they are actively expanding too). But I like FedEx from a operating cost perspective as their fixed expenses are lower than UPS. That pension obligation will eventually come knocking on the door at UPS. I'll try to do more digging into that area if anyone is interested.

 

Cheers!

 

 

[DCG]

Wow..what a great post Catanza. Thanks for taking the time to write all that!

[Liberty]

Thank you, Castanza, that was epic and very interesting.

[Spekulatius]

Great write up. The pension issue with UPS is significant and one reason why I believe to be FDX a better investment. You can see UPS struggle just looking at the book value, which is about zero, mostly due to drain from pensions and also from buybacks.

FDX has pension issues too and they do MM acounting for it on their income statement. They have put $1.5 B / $2B in it the last two years to boost the pension funding level. The pension issue is much smaller with FDX than with UPS.

[gjangal]

This is a great post Castanza. Thank you.