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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 19.3% in 2013 to 14.3% in 2015 because of lower
fuel surcharges and unfavorable exchange rates. Jet Fuel prices declined from $1.50/gallon in January 2015 to $1.08/gallon in December 2015, due to the geopolitical turmoil, increased supply and slow global demand. If fuel costs continue to decline in the future, it could have a positive impact on margins. If FedEx Express margins improve to 17% (as compared to our current estimate of 16%) over our review period, this would lead to a 10% increase in our valuation.
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 and the Ground Package divisions account for approximately 40% and 30% of FedEx revenue, respectively. Though the Express Package business contributes to a higher share of revenues, it records lower margins (14%) compared to FedEx Ground (19%), and therefore constitutes close to 10% of FedEx's valuation. In contrast, FedEx Ground accounts for 60% of FedEx's valuation.
Both, the Ground Package Division and The Express Package Division are valuable to FedEx for the following reasons:
Highest Average Daily Package Volume for the Ground Division
The Ground Package Division is the largest division of FedEx in terms of volume and accounts for close to 60% of the company's valuation. In FY 2015, the division recorded average daily package volume (ADV) of 4.8 million, 6% higher than what it recorded in FY 2014.
The reason behind the increased volume growth in Ground Package Division is the volume burst in US Domestic Economy and the B2C business. With the acquisition of GENCO (third- party logistics provider) in January 2015, we believe that the Ground Package Division will continue to show growth and be a valuable division for FedEx.
Highest composite package yields for the Express Package division
Express Deliveries are FedEx's core strength and boasts very high composite package yields as compared to FedEx 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.
The primary reason behind the increased yields in Express Package is the growing eCommerce industry. With the global B2C eCommerce industry set to grow more than 13% in 2016, we believe FedEx's Express Package division will continue to grow.
Moderate GDP growth
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 estimate to 3.1% for 2015, which is marginally lower than figure recorded in 2014, and projects global growth at the rate of 3.4% in 2016 and 3.6% in 2017.
The main reason for the revision was a slowdown in North America in the first and the fourth quarter of the year, while a slowdown in emerging market economies continued further. (Link)
The global economy remained subdued in 2015 driven by the slowdown in China and gradual tightening in monetary policy in the United States. The first quarter of the year recorded better than expected growth figures in Japan driven by an increase in capital investment. Of the emerging markets, India is expected to show continued growth, while China's growth has slowed down considerably as the economy moves to a consumption-dominated economy.
Growing U.S. e-commerce industry
The growing e-commerce industry has been driving volumes at FedEx's U.S. Domestic Package segment. In 2015, e-commerce sales grew 14.2%, increasing the segment's contribution to overall retail sales from 5.8% in 2014 to 6.5% in 2015. (Link)
Not only is online shopping more convenient, but it has also become more accessible due to the increasing smartphones and tablets penetration, supported with 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 employ FedEx’ services in order to offer their customers timely and economical delivery of products. With the North American e-commerce market estimated to grow more than 30% per year through 2018, we believe FedEx will see increasing volumes in the coming years.
Dimension based pricing
In the past (prior to 2014), FedEx's margins declined due to the growing number of light-weight yet bulky packages. Since these packages were priced on the basis of their weight, they generated 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 was effective from December 29 2014, can further help improve 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 options that offers lower rates.
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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