FedEx Could Keep Delivering Success to Shareholders in the Future
Kevin Perkins & Nikhil Gunderia
On Thursday, analysts at Stifel upgraded their Hold rating to Buy while raising the price target from $175.00 to $281.00. Just last week, FedEx (FDX) reported strong first-quarter fiscal year earnings results which were underestimated by the market. Despite the global challenges, the company is continuing to show that it's a pandemic winner by taking advantage of e-commerce growth causing an increased parcel demand.
FedEx’s success as a company during the past quarter can be attributed to the changes implemented in each business segment, starting with FedEx Express. After experiencing declining traffic from 2000-2015, FedEx Express was repositioned to improve yearly business operations which are being bolstered by demand created by COVID-19. Currently, Express accounts for ~50% of the overall business and, according to Stifel, is prime for expansion. In the past quarter alone, FedEx was able to see daily volume y/y increase 5%.
Similarly, FedEx is finally able to take advantage of its acquisition of TNT from several years ago. Since 2015, TNT has caused FedEx headaches, including causing a decline in the stock price from its 2018 peak. However, now with a strong balance sheet of $7 billion in cash, over $3 billion credit available, and $1.2 billion in free cash flow last quarter, the $1.7 billion in integration costs remaining can be paid down easily. The synergies that TNT brings to FedEx can finally be implemented and help create lower operating costs.
The parting from Amazon has not slowed the volume growth of FedEx Ground. Package demand has soared in the last quarter due to the shift to online shopping during the pandemic. Analysts stated that ”This year, B2C as a percent of total went from >50% of the package volume to >70%. It's fallen back some, but the majority of the deliveries are still B2C right now.”
In fact, both FedEx and UPS are expected to experience peak surcharges in this upcoming season. Since FedEx has integrated a 7-day schedule earlier this year, volume spikes of Ground have expanded to 95% of the population.
Finally, let’s take a look at FedEx Freight and the success it has experienced operating at record high margin levels. With lower fuel costs and better labor management, the overall cost of shipping has dropped while allowing for an increase in overall revenue. Similarly, FedEx Freight is taking on some of the responsibilities of FedEx Express in order to expand overall shipping capacity.
What does this mean for the global parcel market? Well, the increase in e-commerce has been growing the demand for small package delivery which has outpaced FedEx and UPS capacity. Despite the conditions of businesses resulting from COVID-19, parcel networks certainly have surpassed their performance expectations. FedEx is looking forward to growing and becoming more profitable in this thriving market.
Disclosure: At the time of publication, we have no positions in any of the securities mentioned in this article. We wrote this article ourselves, and it expresses our own opinions. We are not receiving compensation for creating this article (other than from TheStreet) and have no business relationship with any company whose stock is mentioned in this article.