FedEx (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.
The company reported annual revenue of $42.7 billion in FY2012 with operating income of over $3 billion. We have a $122 price estimate for the company, which is around 15% above the current market price. Here we discuss the outlook for some of its key divisions and drivers critical to our valuation.
FedEx Express Overview
FedEx Express offers a wide range of shipping services for the U.S. domestic and international delivery of small packages and freight. U.S. Express provides guaranteed delivery of deferred packages in two to three days and overnight delivery of urgent items within the U.S. through its Overnight Box and Overnight Envelop offerings. International Express guarantees time-definite delivery service to more than 220 countries and territories with unparalleled air route authorities and an extensive air/ground infrastructure. The division operates more than 45,000 motorized vehicles and a massive fleet of over 650 aircrafts knitting together more than 375 airports worldwide. It contributed more than 62% in revenues during FY2012. Here are two factors that are driving FedEx Express.
Brighter U.S. Economy Outlook and Penetration in Asia
Compared to the last four years, we expect a relatively healthy U.S. economy with around a 2% GDP growth rate in 2013. A pick-up in economic activity and consumer spending is expected to drive demand for higher priced Overnight Express services in the U.S. market. While the European economy is still marred with uncertainties, a larger penetration in the Asian markets and reduced shipment time across the Pacific with the inclusion of Boeing 777F are expected to drive volumes for this segment.
Voluntary Buyout Program and Fuel Efficiency
On February 15, 2013, FedEx Express and other FedEx companies offered voluntary cash buyouts to the eligible U.S.-based employees.  The program, which is aimed at increasing overall profitability by around $1.7 billion during the next three years, is expected to result in $650 million pretax cash expenditure for FY2013. Higher fuel efficiency targets set by the company after outperforming its earlier target of a 20% improvement in fuel economy by 2020 as compared to 2005 will also push EBITDA margins higher for FedEx Express division. 
FedEx Ground Overview
FedEx Ground offers small-package ground delivery services and low-cost, day-certain service in the U.S. and Canada. It also includes the Smartpost service that uses a hybrid delivery mechanism leveraging the delivery networks of U.S. Postal Service or Canada Post Corporation for final delivery. While the division’s contribution to FY2012 revenues was less than 25%, it was the source of more than 50% of the company’s consolidated operating income. Below are a few trends driving our valuation for the division that makes up more than two-thirds of our price estimate.
Continued Ground Network Expansion
Since 2002, FedEx Ground has opened 11 new hubs, featuring the most advanced material handling technology. It has also expanded and/or relocated more than 500 local facilities. The expansion is expected to continue in the future that will increase FedEx Ground’s average daily package volume.
Rise of e-Commerce and Smartpost
According to research done by comScore and Forrester, the e-commerce market is expected to be worth $250 billion by 2016. With growing expectations of free shipping of goods purchased through the fast-growing electronic market, e-retailers are increasingly adopting the low-cost “hybrid” alternatives like the Smartpost offered by FedEx to cut down on shipment costs. This is expected to drive volumes higher for these offerings. On the other hand, rising fuel prices and expected price hikes by the U.S. Postal Service as it tries to crawl out from its massive debt are expected to drive revenues per package higher as well.Notes:
- Company 8-K Filing, www.investors.fedex.com [↩]
- FedEx Express fleet exceeds 2020 fuel improvement goal of 20%; sets new goal of 30% improvement compared to 2005, March 6th, 2013, www.greencarcongress.com [↩]