12 BARRON’S July22,
InvestorshavesouredonFedExfornumerousreasons—mostofthem
suspect.Whythestockcoulddelivera33%totalreturn. By Al Root
Amazon Who? FedEx
Ups Its Delivery Game
to around $220. Add a dividend yield of 1.6%, and
the shares could deliver a 33% total return.
Amazon, investing heavily in its own logistics
network, represents new competition for FedEx.
Thee-commercepioneerisoffering$10,000,incer-
tain situations, to people who want to start local,
last-mile delivery franchises, and its blue vans—
whichlooksuspiciouslylikewhiteFedExtrucks—
are popping up increasingly in neighborhoods
around the country.
“There is intense media focus on the last mile,
butveryfewpeoplethinkaboutthefirstthousand
miles,” says Rajesh Subramaniam, president and
chief operating officer of FedEx.
GoldmanSachsanalystJordanAlligerestimates
that Amazon would have to invest more than $
billioninlogisticstoreplicateFedEx’sscale.Alliger
recentlyaddedFedExtoGoldman’sConvictionBuy
List, and has a 12-month price target of $200.
AmazonLogisticshasnointentionofbecoming
athirdcompetitorto UnitedParcelService (UPS)
andFedEx,saysGlennGooding,presidentofiDrive
Logistics,whichhelpsbusinesseswithdeliveryser-
vices.“Amazonisbuildingoutitsdeliverynetwork
toserviceitsownPrimecustomers,buttheiroffer-
ingsaren’tcompetitive,”hesays.Henotesthatthe
AmazonproposalsiDrivehasreviewedforitscli-
entsdon’tincludesomecommonindustryinforma-
tion, such as guaranteed time in transit.
“We’re always working to develop new, innova-
tivewaystosupportsmallandmedium[-size]busi-
nesses,includingshippingprogramsthathelpthese
businessesgetpackagestotheircustomersquickly
and reliably,” an Amazon representative told Bar-
ron’s in an email.
FedExbears,too,mightarguethatAmazonwill
improve,butwithe-commerceexpectedtogrowby
15%ineachofthenexttwoyears,there’splentyof
businesstogoaround.FedExrecentlyendedade-
liverypartnershipwithAmazonthathadaccounted
for1.3%ofFedEx’sbusiness,preferringtofocuson
thebroadere-commercemarket.FedExalsoplans
to begin Sunday delivery this year.
FedExboughtTNTExpress,aEuropeandeliv-
erynetwork,formorethan$4billionin2015toex-
pand its international network. But the deal was
troubled almost from the start. In 2017, TNT and
othertransportationcompanieswerehitbyacyber
attack.TheimpactonTNTwasespeciallysevere;
it had underinvested in technology. FedEx spent
millionsonnetworkupgradesforit,whilemanag-
ingthroughaperiodofslowEuropeangrowth.As
FedEx finishes the improvements and fully inte-
grates TNT, the deal should add to earnings.
Concernsaboutfreecashflow mightbethebears’
mostlegitimatebeefaboutFedEx.Thecompanyhas
generatedmorethan$10billionofnetincomeover
the past five years, but only $1 billion of free cash
flow,reflectingaconversionrateof10%.Thatcom-
pares with a historic 56%.
Abigreasonforthisishighercapitalspending.
FedExhasspentmorethan$5billionineachofthe
pastthreeyearstorenewitsaircraftfleetandim-
proveitsMemphisdeliveryhub.“[Theseexpendi-
tures]increaseourefficiencyandhandlingoflarge
packages,” Chief Financial Officer Alan Graf said
ontheJuneearningscall.Asoutlaysdecline,cash
retention—and profit margins—should improve.
ThebiggestthreattoFedExisn’tAmazon,but
slowingeconomicgrowth.“Weareinafreightre-
cession,” says Ben Hartford, an analyst at Baird.
Barron’s calculates that U.S. freight volume
dropped about 5% over the past 12 months. That
hasledtoweakerpricingandlowerprofitmargins
on each package handled. Margins at FedEx Ex-
press,thecompany’slargestdivision,whichhandles
millions of small packages daily, have fallen from
8.2%to5.7%overthepasttwoyears,asglobalman-
ufacturing has declined. FedEx needs the higher
volumethatcomeswithastrongereconomytoreap
thebenefitsfromcapitalspendingandacquisitions.
IftheFederalReservecutsinterestratesthis
year,asexpected,FedExwillbenefit.Lowerrates
tendtoboosteconomicgrowth,resultinginmore
freight.AndiftheFeddoesn’thikerates,lowex-
pectations already are priced into the stock.
0
10
20
30
40
50
60
70¢
Recent Price:
$
12-Month Return:
-28%
2020E Revenue:
$71.4 B
2020E EPS:
$14.
2020E P/E:
Dividend Yield:
1.6%
2013
Source: Company filings,
Barron's calculationsSource:
BloombergFiscal year ends
in May; E=Estimate2016 2019
FedEx Profit
Per Express
Package
FedEx (FDX)
Key Stats
IT’S TIME TO STOP WORRYING ABOUT AMAZON.COM’S