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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.
Significant increase in pension and retiree medical expenses may constrain growth
Over the next few years, retirement plan costs are expected to increase significantly. A significant increase in pension and retiree medical expenses may cause decreases in FedEx's profitability. FedEx uses a discount rate to value the pension and retirement reimbursements it provides to its pensioners. The company is highly sensitive to this discount rate. A one basis point decrease results in nearly $2 million in additional pension costs. A small percentage change may result in the write-off of a large fraction of operating income.
Legislation in the U.S. Congress could raise labor costs
The House of Representatives decision to pass a re-authorization bill for the Federal Aviation Authority (FAA) foreshadows a potential dramatic shift in labor laws that would significantly raise FedEx's salary expenses should further labor laws be passed.
Although employees of FedEx's main private competitor, UPS, are governed by the National Labor Relations Act (NLRA), FedEx's employees are subject to the Railway Labor Act. As a result, unionized FedEx employees must hold a national vote on issues regarding their union. However, legislation may allow employees to hold local votes, which would give the union significantly more leverage and power, and thus, would increase labor costs by as much as 30% for FedEx.
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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