How FedEx Can Rise 20% as Amazon Gets Squeezed

A variety of factors are poised to boost profitability at package delivery specialist FedEx Corp. (FDX), partly to the detriment of e-commerce giant Inc. (AMZN), Barron's reports. For one, President Trump supports a hike in U.S. Postal Service (USPS) rates, accusing Amazon (which owns the anti-Trump Washington Post) of profiting from under-priced parcel shipment rates. If that comes to pass, FedEx, as well as rival United Parcel Service Inc. (UPS), would have cover for increased prices of their own. (For related reading, see also: Trump Tweet Could Boost UPS, FedEx: Bernstein.)

The USPS has applied for a price increase of 4.9%, while both FedEx and UPS recently announced 5% price hikes, per Barron's. Both FedEx and UPS use the USPS for final delivery to the customer's door in some contexts. However, Barron's anticipates that the net impact of a USPS price increase would be positive for both companies.

Shares of FedEx rose 35% in 2017, and have advanced an additional 7% in 2018 through the close on January 9. According to data from FactSet Research Systems cited by Barron's, FedEx has a forward P/E ratio of 17.7 and consensus estimates of EPS growth are 23% for fiscal 2019 and 15% for fiscal 2020. Fiscal year 2018 ends on May 31, with a consensus EPS estimate of $13.13. Barron's sees a 20% increase in the share price as likely in 2018.

Investing Heavily

The positive outlook for FedEx does not rest on price increases alone, or on the benefit from the recently enacted federal corporate income tax cuts. The company has invested heavily in expanding and automating its hubs. Indeed, CEO Fred Smith told Barron's that these hubs are fully automated except for the people unloading trucks, and that this task eventually may be performed by robots as well.

On roughly equal total revenue, rival UPS is about 50% more profitable, Barron's observes, largely because its strategic focus, ground delivery, has higher profit margins than the express services that FedEx features. However, FedEx claims that its automation drive has made it faster than UPS on 29% of ground routes, and equally fast on 68% more, leaving an advantage for UPS on just 3%. Meanwhile, FedEx is expanding its share of ground deliveries partly through acquisitions, such as of Netherlands-based TNT in 2016.The capital expenditure drive by FedEx is near its tail end, with spending anticipated to level off in fiscal 2019 and 2020, per Barron's. However, UPS is ramping up its capex to increase its own efficiency, Barron's adds.

Amazon's Challenge

Price increases by the USPS, FedEx and UPS will hurt Amazon, which uses all three for deliveries, in addition to DHL Express (a division of Deutsche Post, the German post office) and a variety of regional and specialty carriers, as listed on Amazon's website. Moreover, Amazon has been developing its own delivery capabilities, including the leasing of 24 aircraft and the building of its own $1.5 billion air cargo hub. This is partly designed to pressure FedEx and UPS into holding down prices, Barron's says. 

FedEx has fired back with a YouTube video asserting that, to be a serious rival, Amazon's delivery services must grow to 650 planes, 400,000 workers, and tens of thousands of locations. "People focused on e-commerce and local delivery misunderstand our competitive advantage...we can deliver to and from 220 countries in as little as one or two days," FedEx CEO Fred Smith told Barron's. (For more, see also: FedEx, UPS Can Beat Amazon Delivery Entry: Goldman.)

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