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Investment Overview for FedEx (NYSE:FDX)
Below are key drivers of FedEx that present opportunities for upside or downside to the current Trefis price estimate.
FedEx Express EBITDA Margin
- FedEx Express EBITDA Margin: FedEx Express EBITDA Margins declined from 16.8% in 2008 to 14.9% in 2011 because of an increase in fuel surcharges due to the rise in fuel prices globally.
As the world’s crude oil production reaches maximum levels and declines in the coming years, the amount of aviation fuel produced will also decline over time. Jet Fuel had spiked to $3.4/gallon on 24 Feb 2012 due to the geopolitical turmoil, concerns over Iranian supply and increased global demand. Though it corrected to a 12 month low of $2.7/gallon by 18 Jun 2012, it is highly unlikely for fuel to sustain lower levels considering the ongoing volatility. If fuel costs increase by more than expected, due to sharp rise in oil prices, something similar to what was seen in 2008, margins would face severe downward pressure and can neutralize the companies fuel efficiency and other cost cutting measures to keep the margins flat at around 2011 levels. This would imply around a 10% decline in our current price estimate.
FedEx Corp. (NYSE:FDX) is a holding company with subsidiaries that provide a broad range of transportation, e-commerce and business services, under the FedEx brand.
Its primary operating companies are Federal Express Corporation (“FedEx Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading provider of small package ground delivery services; and the FedEx Freight LTL Group, which comprises the FedEx Freight and FedEx National LTL businesses of FedEx Freight Corporation.
These companies represent its major service lines and, along with FedEx Corporate Services, Inc. (“FedEx Services”), form the core of our reportable segments. The FedEx Services segment provides sales, marketing, information technology and customer service support to its transportation segments. In addition, the FedEx Services segment provides customers with retail access to FedEx Express and FedEx Ground shipping services through FedEx Office and Print Services, Inc. (“FedEx Office”).
The Express Package division is the most valuable to the company because of the following reasons.
Highest composite package yields for the Express Package division
The FedEx Express Package division has very high composite package yields compared to Express Freight or the FedEx Ground division. FedEx Express Package's composite package yield is more than 15 times the package yield of FedEx Express Freight and more than 3 times that of FedEx Ground.
Moderated GDP growth forecasts
Demand for shipping volume is closely correlated with the overall consumer demand and GDP growth of an economy. The IMF recently lowered its global GDP outlook by 0.3%, to 3.4%, for the year 2014 citing weak recovery from the poor first quarter performance due to inventory overhang and bad weather impact in the U.S., geopolitical turmoil in Russia and moderate demand in China. (Link) The global economy is set to grow in the second half of 2014 driven by correction in the U.S. market, as the inventory overhang clears out, and continued growth in the Euro region. High growth in Japan driven by the planned unwinding of fiscal stimulus will also aid in the growth in the global GDP in the second half of the year. Of the emerging markets, India is expected to show continued growth driven by positive post election sentiments. China's growth will slow down marginally, by 0.2%, due to limited and targeted policy measures to support activity in the second half of the year.
Growing U.S. e-commerce industry
Growing e-commerce industry has been driving volumes at UPS's U.S. Domestic Package segment. In 2013, e-commerce sales grew 17%, increasing its contribution to overall retail sales from 5.2% to 5.8%. (Link) This is because, not only is online shopping more convenient, but has also become more accessible due to the increase in smartphones and tablets and higher internet penetration. Many brick-and-mortar retailers have rolled out online shopping portals to cater to the growing online retail shopping customer base. Deals and discounts on online shopping also encourage customers to purchase via websites rather than traditional stores. FedEx’s package volume is directly impacted by e-commerce sales since many online retailers, such as Amazon (NASDAQ:AMZN), employ FedEx’s services in order to offer their customers timely and economical delivery of products. With the North American e-commerce market forecast to grow more than 30% per year through 2018, we believe FedEx's Ground segment should continue to grow in the coming years. (Link)
Dimension based pricing
FedEx's margins have been falling due to the growing number of light-weight yet bulky packages. Since these packages are priced on the basis of their weight, they generate lower revenues due to lesser packages carried per vehicle or aircraft. In order to realize better prices from such packages, FedEx has decided to follow a dimension based pricing strategy which will result in a 30-50% increase in pricing of the light-weight yet bulky packages. This strategy, which will be effective from January 5, 2015, should help in improving margins.
Demand for cheaper shipping options and higher competition from sea-borne shipping
There has been a clear trend of customers shifting from premium services to slower or deferred products while seeking lower shipping expenses. The air freight carriers are accordingly facing higher market share competition with seaborne shipping that offers lower rates. These trends could continue through 2013.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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