Conf call redux: does Kuehne + Nagel know its toys from its teus?
Yo bro, where’s the growth?
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The Loadstar team has selected six companies that could be the undisputed High Flyers in 2016 – well, at least we hope they do not fare any worse than in 2015, which was a very challenging year for most of them, to put it mildly.
The six are UPS, FedEx, Deutsche Post-DHL, Maersk, DSV/UTi (assuming the tie-up goes through) and XPO Logistics.
UPS, FedEx and Deutsche Post-DHL are faced with rapidly changing market dynamics and are challenged by shifting consumer behaviour and habits. Online shopping dictates corporate strategy and a more efficient approach to the business these days.
My quick take? They have all it takes to get through one of the most difficult transport markets since the credit crunch.
Elsewhere, Maersk is a bit more troubled – but so is the shipping industry. It could be decision time for its management team, particularly with regard to the assets that it plans to sell.
Then, we had no choice but to select DSV/UTi and XPO Logistics – two freight forwarders that have embraced aggressive growth strategies but had different fortunes last year, at least judging by their stock performances.
FedEx, UPS & DHL
The shares of FedEx and UPS have lost 27% and 20% of value, respectively, since their 52-week highs of 2015.
While UPS stock is now holding up relatively well in a truly challenging market both for transport companies and their investors, the shares of FedEx have underperformed those of its rival by 20 percentage points since June. Most of that drop should be associated with high expectations for the TNT deal, even though UPS also offers a much higher yield to its shareholders, which has clearly rendered its shares more palatable than those of FedEx in a stock market struggling for direction and trading on thin volumes.
When the FedEx/TNT deal was announced in early 2015, we wrote: “TNT takeover could be a ‘match made in heaven’, says FedEx – but there are risks.”
I still prefer FedEx to UPS in terms of business fundamentals, but the time to deliver value has now come, and FedEx is still not having the best of times, although Goldman Sachs believes its stock still offers plenty of upside. FedEx is taking risks by acquiring TNT and expanding into Europe – it is paying a lot for it, as we argued last year – but there’s some other issues here: recent news didn’t help boost its reputation, either.
FedEx grabbed the spotlight and faced criticism on social media over the Christmas season. Although its management team tried to cope with a very bad round of publicity, it could do very little to calm angry customers.
The solution certainly was not to blame last-minute shoppers for Christmas delays.
Reuters reported on 29 December that “after two consecutive years of problems during its holiday peak package season, UPS delivered on time at Christmas this year while its main rival FedEx had a last-minute stumble that left some gifts undelivered until after the holiday.”
UPS, meanwhile, was cautious and learned from its past mistakes — and it paid off.
Amazon
This kind of news is particularly relevant at a time when Amazon is rumoured to be sourcing up to 60 B767 freighters as it prepares to launch its own air freight operation, and you could bet we’ll hear more on this front from Amazon this year and next. So, this year and next will be pivotal both for FedEx and UPS.
Online shopping is a key value driver, and the speed at which the main players deliver the goods nowadays is measured in seconds, rather than in minutes or days. Sources in the logistics industry tell me that some smaller transport players are trying to steal marketshare from the incumbents but have neither the capabilities nor the infrastructure network to support their plans. Hence, the real threat to the market leaders comes from tech companies such as Amazon, which has immense resources and has an incentive, based on its own offering, to get deeper into the transport value chain.
In this context, Germany’s Deutsche Post-DHL has proved to be a world-class player over the years, but its shares, too, are trading 21% below their 52-week high of €31.2. Size is not the answer, and slimming down would help it attract interest from suitors for its parts, in my view, as I argued in 2014.
At present, Deutsche Post-DHL is neither a growth story nor a yield play (its forward yield is below 1%), so it’s about the right time for it to decide what it want to be and what it wants to do when it grows up.
DSV, Maersk and XPO
If DSV manages to close the acquisition of UTi Worldwide – which remains the most likely outcome, in my view – it will have managed to find a way to boost mid-term earnings while enlarging its global reach with a deal that makes a lot of sense, also given its price.
The way forward is called “cost synergy”, and thousands of jobs could be lost, but I have no doubt that DSV management will do what is in the best interest of shareholders. So, it could be another great year for a company whose stock trades only 7% below its 52-week high; its performance on the stock market testifies to the fact that companies that are properly managed tend to reward shareholders with higher returns than those of their rivals even in difficult market conditions.
Things are a bit more complicated at Maersk, whose stock has plunged over 20% in the last three months alone. Management is faced with tough decisions, particularly with regard to Maersk Line, which absorbs a huge amount of capital and operates in a sector that is consolidating at a very fast pace. Maersk has the financial wherewithal to withstand a prolonged downturn, but there comes a point where it should lead the way out of a recessionary environment for container shipping by engineering some value-accretive solution. There was very little I liked over the last 12 months.
Finally, XPO Logistics, a fascinating firm led by a very ambitious management team. Its equity value has halved since mid-2015, but there’s little evidence that its strategy is plainly wrong.
Its latest Con-way deal was “one step too far”, according to one of my banking sources, but then its valuation would have likely been under pressure had it not pursued any acquisitions. “Onwards and upwards” springs to mind, but whether 2016 will be a successful year in terms of share capital appreciation – well, that is another matter.
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