SA: FedEx: Recent developments suggest a clear path to $300

© Cineberg Ug

SEEKING ALPHA‘s “Return on Capital” writes:

– Due to its “operate independently” mantra, FedEx has a bloated, underutilized and chronically unprofitable domestic Express network.

– Recent actions suggest that FedEx is in the early innings of integrating this network with its robust Ground infrastructure. Based on my estimates, this could drive 300-500 bps in margin.

– This can double the company’s stock; a multiple re-rate provides even further upside.

FedEx (FDX) is a well-known name and the company has been written about extensively in the financial press, so I won’t dwell too much on the company’s description. The thesis is simple:

Due to its “operate independently” mantra, FedEx has a bloated and underutilized domestic Express network. Recent actions suggest that FedEx is in the early innings of integrating this network with its robust Ground infrastructure. Based on my estimates, this could drive 300-500 bps in margin improvement, equivalent to >$4bn in annual savings. This can double the company’s stock; a multiple re-rate provides even further upside.

By way of introduction, FedEx operates three segments: FedEx Express ($40bn revenues, 5.5% operating margin), FedEx Ground ($21bn in revenues, 13% operating margin) and FedEx Freight ($8bn in revenue, 8% operating margin). FedEx Express deals with domestic and international “Express”, or time-definite shipping, FedEx Ground deals with domestic/Canadian “day-definite” shipping and Freight is the largest less-than-truckload freight forwarder in the U.S.

Why Two Networks?

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