FDX - FedEx

[Castanza]

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.

 

Interesting! I had no idea FedEx had a pension plan. Really though, the root of this issue is the Union. The Teamsters are nothing more than a mob which will ultimately bleed the company dry. I was told by older drivers that the union promised 14% returns in the past! How crazy is that?! Look at Central States Pension fund. UPS had to take it over because it was basically bankrupt.

 

Another little tidbit is the wages moving forward. by 2022 drivers will be making a base rate of $42/hr. That's what this last contract vote was about.

 

However they did pass the ability to add a new class of drivers which will be used to supplement the current workforce. They will be in a lower tier wage I think capped around $25/hr and are also union employees (Everyone I know voted this down, but the union disregarded its members and passed it through) In my opinion this only signifies the companies concern with meeting future pension obligations as they are trying to shrink the size of "full-time" top rate drivers. I doubt there will be many traditional drivers hired moving forward.

 

This does benefit the union cartel though since their union dues are based on hourly wages. This new class of drivers will be made up of part-time dock workers who drive part of the day. As you can imagine this will bring in more revenue for the union. But the catch is the way the new contract is worded, current full-time drivers are not guaranteed 40/hrs a week if they don't work on a Monday of that week. So a lot of drivers will not meet the 1800/hrs a year requirement to have that year count towards their pension.

 

This means a longer career, drawn out with money going into the pension. Less full-time employees retiring down the line drawing on the pension. And a lower wage work force that will have a lower draw on the net pension funds.

 

This is a very big concern and you can see both UPS and the Union recognize it. They are playing catch up in terms of wages compared to FedEx and Amazon.

[dwy000]

Costanza - your post was fantastic.  That's the kind of background and insight you will never be able to get from 10K's and conference calls.

[bizaro86]

Thanks for sharing! I would disagree on customer perception, at least where I live. A huge percentage of packages shipped to Canada come from the US. UPS is everyone's last choice because of their extremely high customs brokerage charges. I now take the time to use a 3rd party broker for everything sent to my business using UPS. Savings average 80%.

[Viking]

Costanza - your post was fantastic.  That's the kind of background and insight you will never be able to get from 10K's and conference calls.

 

Or industry analysts. Great post; please keep them coming :-)

[Castanza]

Thanks for sharing! I would disagree on customer perception, at least where I live. A huge percentage of packages shipped to Canada come from the US. UPS is everyone's last choice because of their extremely high customs brokerage charges. I now take the time to use a 3rd party broker for everything sent to my business using UPS. Savings average 80%.

 

In fairness I was just talking about US customer perception  :D

 

There is another company up there that's more common that UPS right? Purolator or something like that?

 

Edit: And I appreciate the sentiment everyone!

[Gregmal]

This is some high quality content brought to COBF. Thanks Costanza. I like both UPS and FDX although I dont own either yet. I do own Deutsche Post.

[Castanza]

This is some high quality content brought to COBF. Thanks Costanza. I like both UPS and FDX although I dont own either yet. I do own Deutsche Post.

 

DHL is an entire different animal than UPS and FedEx. The scope of their business is quite impressive. They are honestly more comparable to Amazon than UPS or FedEx as they have Express (Next day air stuff), DGF(Global Forwarding), DSC (supply chain), Deutsche Post(German Post Office), Cargo shipping, etc. Then if you dig in even further they have  a lot of database/cloud storage, web hosting stuff etc. They run services for Etsy, and ASOS (British clothing company) and a lot of other companies.

 

But I am with you on the investment front. I have positions in all three, but DHL is by far the most diversified of the companies (except amazon).

[petec]

I may get laughed out of the room for this but what happens if driverless technology actually works? At a very high level:

1) much lower operating costs in time, and pension issues go away;

2) migh higher capex in the short term as fleets get replaced;

3) presumably the competitive advantage (route density) still holds for the incumbents;

4) challenge might be the loading and unloading without the driver but hard to imagine a solution can't be found...

 

 

 

 

[Spekulatius]

I may get laughed out of the room for this but what happens if driverless technology actually works? At a very high level:

1) much lower operating costs in time, and pension issues go away;

2) migh higher capex in the short term as fleets get replaced;

3) presumably the competitive advantage (route density) still holds for the incumbents;

4) challenge might be the loading and unloading without the driver but hard to imagine a solution can't be found...

 

Pensions don’t go away, when a company closes a pension fund. Those employees that were covered by the pension agreement still accumulate claims as long as they work for the company, which could be decades until they reach retirement age, and then another couple of decades when they can draw pensions. If you close a pension plan now  there are probably have substantial claims open 50 years from the closure date still.

[Viking]

Castanza/other posters; does anyone have an opinion on Fedex and their purchase of TNT? This purchase has taken much longer, and cost much more, to integrate than expected. It has depressed Fedex near term earnings.

 

Potential catalyst? The good news is if Fedex is 12-18 months from actually completing the integration then the significant costs associated should end. This should improve bottom line results a fair bit for Fedex. And a fully integrated TNT should also help Fedex grow top line.

 

Thoughts?

[petec]

I may get laughed out of the room for this but what happens if driverless technology actually works? At a very high level:

1) much lower operating costs in time, and pension issues go away;

2) migh higher capex in the short term as fleets get replaced;

3) presumably the competitive advantage (route density) still holds for the incumbents;

4) challenge might be the loading and unloading without the driver but hard to imagine a solution can't be found...

 

Pensions don’t go away, when a company closes a pension fund. Those employees that were covered by the pension agreement still accumulate claims as long as they work for the company, which could be decades until they reach retirement age, and then another couple of decades when they can draw pensions. If you close a pension plan now  there are probably have substantial claims open 50 years from the closure date still.

 

Terrible phrasing on my part. What I meant was the flow of employees into the pension scheme would slow dramatically, and if margins were to rise topup contributions would be less of cash flow, so over time (in fact possibly fairly rapidly) the pension would cease to be a major concern.

[Castanza]

I may get laughed out of the room for this but what happens if driverless technology actually works? At a very high level:

1) much lower operating costs in time, and pension issues go away;

2) migh higher capex in the short term as fleets get replaced;

3) presumably the competitive advantage (route density) still holds for the incumbents;

4) challenge might be the loading and unloading without the driver but hard to imagine a solution can't be found...

 

I don't think driver-less tech is a threat at all. As someone who has done the job I just don't see a reason to implement it. The job is 30% driving and 70% delivering boxes, running from dogs, climbing flights of stairs, entering apartment buildings, using intercoms, talking with secretaries, making judgement calls that an algorithm simply wouldn't be able to do as efficiently. The accident rate of UPS drivers would not justify the cost of investing in driver-less tech. At the very least you would still need a human in the car to get the package out of the back and actually deliver it. But those wages will still be high. So at that point you might as well just pay a human to do it all. And i don't know if you've seen the pack of a UPS truck, it certainly isn't organized with clean walking paths etc. You're frequently climbing over boxes, moving stuff, etc. I mean they handle up to 150lbs. You deliver toilets, snowplows, lawn mowers, flat packed furniture, etc.

 

UPS is very much looking into automation. They have entire teams dedicated to drones, and warehouse automation. I think this is the best place to try and implement something. I have been to both Louisville World Port and the new Atlanta hub (flag ship hubs). They have robot carts that cart packages around (think radio flyer wagon with a brain). But half the time they just sit unused because they are too slow, get freaked out if anything comes near them etc. The CEO has talked at lengths regarding automation and they feel the warehouse is the best place to do this. Whether its drones helping to fly sort boxes or something I don't know, but the tech certainly isn't here yet.

 

Now for amazon, which primarily ships packages in the 5-10lb range I can see drones being functions. But even still they are extremely situational. And more gimmicky than anything else.

 

The best tech I have seen so far (And I've been in warehouses of every company Amazon included) was at DHL in Prague. Their warehouses have some tech that makes sense. Their employees use google glass which locates boxes for them when looking at a wall of packages etc. And they have these carts that use a wireless signal and are tethered to a specific employee. They simply follow the employee around as they sort packages and carry ones that are selected. When the cart is full they can send it off and another arrives. It's simple and efficient. It works alongside current employees. But like I said it's all situational. What works in one center might now work in another.

 

Cheers!

[Spekulatius]

FDX results are out and they aren’t good. One could see this coming:

https://finance.yahoo.com/video/fedex-q3-results-disappoint-210047285.html

 

Might become interesting again. I am surprised they haven’t guided down Capex with the slower growth. Negligible share buybacks (spent $93M), because no FCF expected this year. I like the business, but this doesn’t look like a great story.

[dwy000]

I really struggle with the cash flow story for this company altogether.  Capex is continually higher than depreciation, which is fine if you are investing for growth - but the growth in operating cash flow has been non existent (2019 is likely to be in the same range as 2016 and that's after buying TNT).  After capex and acquisitions, FCF hasn't been able to fund dividends and the debt number keeps growing. 

[Viking]

I really struggle with the cash flow story for this company altogether.  Capex is continually higher than depreciation, which is fine if you are investing for growth - but the growth in operating cash flow has been non existent (2019 is likely to be in the same range as 2016 and that's after buying TNT).  After capex and acquisitions, FCF hasn't been able to fund dividends and the debt number keeps growing.

 

Dwy000, your concern was asked by an analyst on the conference call... and the CEO basically said they are running the company for the long term and the investments they are making are necessary (like replacing the oldest airplanes in their fleet over the next 18 months). Bottom line is we likely can expect negative free cash flow the next year or two, which is not ideal.

 

They continue to really struggle with the TNT aquisition; weakness in Europe is not helping.

 

I love the industry with all the tailwinds. It is an oligopoly. It is disappointing that Fedex is not able to post better returns. The next year looks to have more headwinds than tailwinds for the company.

[Jurgis]

I really struggle with the cash flow story for this company altogether.  Capex is continually higher than depreciation, which is fine if you are investing for growth - but the growth in operating cash flow has been non existent (2019 is likely to be in the same range as 2016 and that's after buying TNT).  After capex and acquisitions, FCF hasn't been able to fund dividends and the debt number keeps growing.

 

Yes.

[kab60]

Same. Cashflow (or lack of) keeps me away. I really like the 3PL guys since they're asset light (DSV, CH Robinson, Expeditors among my favorites) but they always look expensive (which they weren't really).

[dwy000]

I really struggle with the cash flow story for this company altogether.  Capex is continually higher than depreciation, which is fine if you are investing for growth - but the growth in operating cash flow has been non existent (2019 is likely to be in the same range as 2016 and that's after buying TNT).  After capex and acquisitions, FCF hasn't been able to fund dividends and the debt number keeps growing.

 

Dwy000, your concern was asked by an analyst on the conference call... and the CEO basically said they are running the company for the long term and the investments they are making are necessary (like replacing the oldest airplanes in their fleet over the next 18 months). Bottom line is we likely can expect negative free cash flow the next year or two, which is not ideal.

 

They continue to really struggle with the TNT aquisition; weakness in Europe is not helping.

 

I love the industry with all the tailwinds. It is an oligopoly. It is disappointing that Fedex is not able to post better returns. The next year looks to have more headwinds than tailwinds for the company.

 

Thanks Viking I missed that. I like the industry dynamics as well and only see this industry growing going forward which is why I started to dig in. 

 

The problem with the CEO's reply is that the future never comes.  Replacing aging planes and upgrading systems and technology isnt really one time or growth - that's just running the business.  In my view the TNT acquisition has been a disaster. The integration costs are counted in the $billions and it doesnt appear to have created much in the way of synergies (cost or revenue) yet.

 

If you cant generate huge cash flow in todays business environment and with the industry tailwinds you really have to ask under what circumstances it will.

 

Watching in fascination from the sdielines...

[Castanza]

I really struggle with the cash flow story for this company altogether.  Capex is continually higher than depreciation, which is fine if you are investing for growth - but the growth in operating cash flow has been non existent (2019 is likely to be in the same range as 2016 and that's after buying TNT).  After capex and acquisitions, FCF hasn't been able to fund dividends and the debt number keeps growing.

 

Dwy000, your concern was asked by an analyst on the conference call... and the CEO basically said they are running the company for the long term and the investments they are making are necessary (like replacing the oldest airplanes in their fleet over the next 18 months). Bottom line is we likely can expect negative free cash flow the next year or two, which is not ideal.

 

They continue to really struggle with the TNT aquisition; weakness in Europe is not helping.

 

I love the industry with all the tailwinds. It is an oligopoly. It is disappointing that Fedex is not able to post better returns. The next year looks to have more headwinds than tailwinds for the company.

 

Thanks Viking I missed that. I like the industry dynamics as well and only see this industry growing going forward which is why I started to dig in. 

 

The problem with the CEO's reply is that the future never comes.  Replacing aging planes and upgrading systems and technology isnt really one time or growth - that's just running the business.  In my view the TNT acquisition has been a disaster. The integration costs are counted in the $billions and it doesnt appear to have created much in the way of synergies (cost or revenue) yet.

 

If you cant generate huge cash flow in todays business environment and with the industry tailwinds you really have to ask under what circumstances it will.

 

Watching in fascination from the sdielines...

 

Not sure about the service time of planes but I know at UPS for their package car fleet the life expectancy was 30 years. And they all were under warranty for at least the first two years. I will say the newer trucks are junk (Workhorse, and Freightliners) I believe the Freightliners had the same 5.7L engine Chevy used in the Silverado. But everything new is gas even though diesel is more fuel efficient etc. Our mechanics were always complaining about the issues with these brand new trucks.

 

We had quite a few old diesels that had over 1mil miles on them and were still going out on daily routes. There were a few gas ones that had close to that but probably had a few different engines in them over their service time.

 

I don't have any financials though so this is "educated speculation." But I'm sure you could find the price somewhere. It is also worth noting that UPS runs their own "u pull it" scrap yard where they retire their fleet and part them out. They used to sell them for a decent price but stopped this for security reasons.

 

I'm sure insurance costs are extremely high on these things. I know from a liability standpoint any intersection accident that involved another driver would cost UPS an average of 40.6k, and this goes up every year or so.

 

Sorry I'm kind of rambling lol Long story short, I would say you're right and wrong that the future never comes. But there are periods where fleets aren't being grown.

[Spekulatius]

FDX can’t or shouldn’t really stop their airplane purchasing program, since its long term, but revenue growth has slowed from almost 10% to 2%, and that should mean that some short cycle Capex can be reduced. The fact that they haven’t changed their Capex plan despite the above seems odd.

It looks like FDX is a tough spot for a while with reduced profit margins, slow growth and still high Capex spent. Its not a recipe for a strong performing stock, that’s for sure.

 

Edit: I sold most of my shares before the quarterly results were published and sold the remainder @175. I expected the stock to go down more than it did.

[Castanza]

FDX can’t or shouldn’t really stop their airplane purchasing program, since its long term, but revenue growth has slowed from almost 10% to 2%, and that should mean that some short cycle Capex can be reduced. The fact that they haven’t changed their Capex plan despite the above seems odd.

It looks like FDX is a tough spot for a while with reduced profit margins, slow growth and still high Capex spent. Its not a recipe for a strong performing stock, that’s for sure.

 

Edit: I sold most of my shares before the quarterly results were published and sold the remainder @175. I expected the stock to go down more than it did.

 

I agree, FedEx is beginning to show signs of trouble. I Agree with the above comment that the TNT acquisition was a poor choice. Europe IS slowing. I work on the IT side (big data) for a lot of European companies and I can say they are pinching pennies and the sentiment has certainly shifted.

 

I think if you want to make a play in logistics a lot of the 3rd party or smaller logistics companies are better plays. C.H Robinson for example. I think UPS is better positioned because they are primarily focused in the US. I think we will see manufacturing work its way back as government cracks down on transportation, emission, etc. Look at the standard changes in ship fuel (low sulfur). IMO it's just the beginning. Many products currently have razor thin margins to ship (see $BERY) as it is. I think this will force companies to manufacture in a more "local" area.

 

But the pension issues at UPS still keep me away. Haven't purchased any shares since I left the company (10% discount was nice). And I currently don't hold any.

[DTEJD1997]

hey all:

 

I used to ship a TON with Fed-ex.  My business had an account with daily pickup. 

 

I've changed my business somewhat and have used other carriers.  I've been working hard and getting lucky, so I'm growing and building back up.

 

I've also started to have a need to ship larger things, so I've shipped with Fed-Ex ground.

 

I've shipped TWO packages with them this year, and BOTH have had problems/damage.  100% failure rate.  In both instances, Fed-Ex was not amenable to paying out/providing a solution.

 

I've talked with a few other small business owners and they have also reported SEVERE problems with Fed-Ex ground.

 

I am very seriously considering NOT using Fed-Ex ground at all with what I've experienced & heard from others.

[Spekulatius]

Looks like FDX business in China is going to be impaired. I believe the Chinese are playing tit for tat.

https://finance.yahoo.com/news/huawei-reviewing-fedex-relationship-says-051946713.html

FDX close to YE2018 lows.

Could Deutsche Post (DHL) benefit from this?

 

No position.

[coc]

Another thanks to @castanza. Very helpful inside baseball.

[Castanza]

https://finance.yahoo.com/news/ups-has-mutually-beneficial-relationship-with-amazon-ceo-194750165.html

 

Admittedly I have not been following this sector as closely as I typically do this past year. Between the trade wars and market uncertainty it's been difficult to invest in this sector with any type of confidence.

 

The partnership between UPS and Amazon is becoming quite interesting to say the least. Opposite of what Abney leads on in the interview; word on the street is that Amazon is beginning to try and poach b2b customers from UPS and FedEx. However, this attempt is still limited by bulk and parcel size. If memory serves me correctly Amazon drivers don't handle anything over 25lbs (anything over typically goes to UPS). This is still significant though as Amazon was not previously thought to be entering the b2b space. This UPS/Amazon relationship is something I'm quite excited to see develop over the coming years. But there are so many moving parts to this it's difficult to predict any type of outcome.

 

With FedEx opting out of the 1-2 day Amazon shipping contract it will be very interesting to see how UPS handles this volume (assuming it's pushed to them) increase this peak in such a short time frame. I believe it's been three years since the dreaded Prime Guarantee peak season where FedEx backed out and left UPS high and dry with millions of packages sitting in Louisville. What I can say is that UPS is hiring seasonal workers with the highest wages it has ever offered (U-Haul will be quite happy) as well as many Personal Vehicle Delivery positions.

 

Issues still plaguing the company

- Pension issues (Another round of pension buyouts is in the mix for 2020 age 55+ and for all former non-retired employees who have 5+ years vested) It seems UPS is highly motivated to get people off the books.

 

- High wages 32/hr 48/hr overtime. New position 22.4 is being pushed hard. Slightly lower wage driver who also works inside as a loader/unloader. They supplement current drivers with a T-S or W-S schedule. The position cannot makeup more than 25% of current driver workforce. I'd imagine UPS will reach this cap ASAP to maximize resource flexibility.  22.4 employees are guaranteed 40hrs a week (mix of sorting/driving). I think this position will help sure up some of the pension issues by having more full-time employees and also help reduce employee turnover costs in the part-time segments.

 

- Overtime/Weekend Pay (Promises to reduce overtime have been futile in many areas. Drivers still reportedly working 10+ hour days. This should be alleviated somewhat with the adoption of 22.4 as well as the double time pay for weekend work for normal driver positions)

 

 

All in all it looks like UPS is doing better than this time last year.

 

3Q19 EPS of $2.01, Up More Than 16%; Adjusted* EPS Up 13.7% to

$2.07

• U.S. Daily Volume Grew Above 9%; Next Day Air Volume Jumped Nearly

24%

• U.S. Operating Profit Rose Over 28%; Grew Nearly 26% on an Adjusted

Basis

• Positive Operating Leverage in U.S. Driven by Lower Unit

Cost

• International Operating Profit Up 24.4%; and 20.3% on an Adjusted

Basis

• Supply Chain and Freight Operating Margin of 7.3%; Adjusted Margin of

7.6%

• Reaffirms 2019 Adjusted EPS (7.75-7.45 up from last year 7.37-7.07) and Raises Adjusted FCF Target to Over

$4.0B

 

Investment in network streamlining seems to have helped the bottom line. 26% Operating Profit increase and 10.6% operating margin. Rev percentage increase is down by about 2ish % yoy. 

 

http://www.investors.ups.com/static-files/0a62f412-6232-4d28-a04e-5925c9b66da4