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WIKI ANALYSIS
| Table of Contents |
| Intro and Overview |
| Introduction |
| Business Overview |
| Trends and Forces |
| Key Trends and Forces |
| Competition |
FedEx Corporation (NYSE: FDX) is a carrier service best known for offering express small package and document shipping. Since pioneering overnight shipping in the 1970s, FedEx has moved into slower and less expensive ground service for packages and into freight transportation. FedEx serves American business customers primarily but is moving rapidly into foreign markets. All but freight services are available to individuals through FedEx Office storefronts (1300 in the U.S. and more abroad), which also offer printing, photocopying, internet access, and other business-center services.
FedEx is the clear market leader in express shipping, with 49% market share by volume in the U.S. In ground shipping, it is only starting to establish itself in a market dominated by competitor UPS. In its freight businesses too, FedEx is gaining market share but its long-term success is uncertain. FedEx is placing a big bet on the expanded international network it is now developing. Building out an international shipping network creates high upfront costs. FedEx's success will depend on how quickly it can attract customers to this expanded network.
FedEx's profits are highly cyclical; they depend on the strength of the U.S. and world economies because economic health is a key determinant of package volumes. Package volumes and economic strength are so tightly correlated that economists will study package volume data from companies like FedEx as an indicator of whether economic activity is slowing or heating up.
Business Overview
FedEx Corporation was founded in the 1970s as an overnight air carrier. Today, FedEx is comprised of several independently operated companies, each offering different services.
Business and Financial Metrics
With a poor fiscal year overall in 2009, FedEx decreased its revenue by 6.5% from $37.953 billion to $35.497 billion.[2] While the Ground Segment's revenues actually increased, the decline in revenue was largely due to FedEx's Express segment, which saw decreased sales in both its domestic and international markets.[3] Although FedEx was able to improve its revenue per package, or yield, by 3% in its Ground Segment, the drops in yield of 3.5% and 3% in the Express and Freight Segments, respectively, contributed to FedEx's overall decline in operating margins from 5.5% to 2.1% (Operating Income dropped by $1,328 million to $747 million in 2009).[2]
A combination of high operating expenses and falling revenues ultimately led to a deterioration of FedEx's return on equity and return on assets, which fell to 0.7% and 0.4% from 7.7% and 4.4%, respectively.[2] Although the company remained profitable, its operating income and net income both fell substantially, to $747 million and $98 million, respectively.[2] These represented 64% and 91% declines, respectively.
The first quarter of 2010 (FedEx's fiscal year ends March 31) resulted in a greater than 52% decline in net income, though the firm did remain profitable with income of $181 million.[4] Revenue and expenses both fell in the quarter; however, the drop in revenue outpaced that in expense at 19.6% as opposed to 17.6%.[4] The decline in fuel-related expense played a key role in FedEx's ability to scale back expenses, as hedging and favorable prices, as well as decreased production, led to a 56.4% fall.[4] Although each of FDX's reporting segment reported declines in revenue, the Ground segment did have a modest increase in operating income, from $196 to $209 million.[4] After the precipitous drop between 3Q09 and 4Q09, total average daily package volume has stabilized, though there was a slight decline in 1Q10 from 6,659 to 6,647 million.[4]
| FY 2007 | FY 2008 | FY 2009 | |
|---|---|---|---|
| Revenue ($ millions) | 35,214 | 37,953 | 35,497 |
| Operating Income ($ millions) | 3,276 | 2,075 | 747 |
| Net Income ($ millions) | 2,016 | 1,125 | 98 |
| Operating Margin | 9.3% | 5.5% | 2.1% |
| Gross Margin | 5.7% | 3.0% | 0.3% |
| Increase (Decrease) in Revenues | 9.0% | 7.8% | (6.5%) |
Business Segments
FedEx Express (63% of total revenues)[5]
The world’s largest express transportation company,[6] FedEx Express offers package delivery to every address in the United States and more than 220 countries and territories across the world.[7] It offers deliveries guaranteed to arrive at their destination within one (with "First Overnight" service) to three business days (with "Express Saver" service) and serves markets that comprise more than 90% of the world’s gross domestic product.[6] FedEx Express also includes FedEx Trade Networks,[6] a company that provides international trade services and has a customs brokerage service that helps move shipments through customs quickly.[8]
There is good reason to believe that FedEx will capitalize effectively on the growth of international trade. Revenue from FedEx’s international priority service—its primary international parcel express service— has grown at a compound annual growth rate of more than 14% for the last 8 years. It now represents 63% of the company’s revenue, up from 23% eight years ago.
FedEx has expanded by acquiring some small carriers in strategically valuable markets and by forging contracts with others, known in the industry as global service providers. FedEx’s international acquisitions have done well in the past, and the company has achieved 10-15% return on invested capital every year since 2000. FedEx’s current network covers the largest emerging markets. FedEx currently offers more flights to China than any other American carrier (26 flights weekly) and has about 22% share in the Asian small-package market, more than any carrier except DHL, which has 32% share.
Still, it takes time to integrate acquired carriers’ networks into existing ones and to increase the volume shipped over acquired networks to the point where revenues meet expectations. To reduce the draining effect of acquisitions, FedEx has expanded into some strategically significant areas using contracts with local carriers initially, to reduce the risk of poor returns early on, and acquired those carriers only later as volumes reached critical levels. In 2007 FedEx acquired DTW Group and PAFEX, previously its contract providers in China and India respectively.
In November 2007 FedEx announced the opening of a new branch in Huzhou, China. Huzhou is considered to be one of the second- or third-tier cities in China. This market however, is growing very quickly and the opening of this branch reflects FedEx's goal to expand into growing markets internationally. The branch is considered state-of-the-art and will provide FedEx with the capability to streamline their delivery process in China.[9]
In the long term, acquiring its own GSPs may yield the same results for FedEx that organic growth would yield. In the short term however, it reduces the likelihood that FedEx will have to file surprising earnings reports and may reduce the volatility of the share price for that reason. It also distinguishes FedEx from competitor UPS, which has generally expanded into new markets organically before making acquisitions outright.
Moreover, FDX has a long standing relationship with TNT NV, Holland and merger talks has been around for a long period of time. "It would give FedEx a strong presence within Europe and the ability to offer comprehensive logistics and supply chain solutions," is the view of various analysts. [10]
FedEx Ground (20% of total revenues)[5]
FedEx Ground offers small-package ground delivery service throughout the United States, Canada, and Puerto Rico.[6] This segment also includes FedEx SmartPost which delivers high volumes of low-weight, less time-sensitive business-to-consumer packages using the United States Postal Service for final legs of delivery.[6]
FedEx Freight (12% of total revenues)[5]
FedEx Freight provides less-than-truckload (LTL) freight services through its FedEx Freight businesses (regional LTL freight services) and its FedEx National LTL business (long-haul LTL freight services).[6]
(LTL service consolidates material for several customers on a single truck. Drivers visit several customers a day, typically waiting while each loads or unloads shipments. LTL service is generally faster than full-truckload service, for which carriers leave trailers with customers and pick them up only when they are full.) Forged in 2001 after FedEx acquired LTL carrier American Freightways, FedEx Freight is a new but promising business. It earned $4.415 billion in revenues in 2009, 12% of FedEx’s total revenues.
Most freight transportation businesses look nothing like major parcel carriers. Parcel giants like FedEx, UPS, and DHL built their businesses on reliability, which is scarce in American freight transportation. FedEx has identified reliable freight service as an unfilled niche and established its LTL business with that niche in mind.
FedEx's guiding vision and the FedEx brand surely helped to attract its first freight customers. But FedEx Freight's operations have been solid as well. The company was forged by the acquisition of two LTL carriers offering service to complementary regions-Western regional carrier Viking (1997) and Eastern/Midwestern carrier American Freightways (2000-2001). Since these acquisitions, FedEx Freight's revenues have grown at a CAGR of 15%. FedEx's share of the regional LTL market is now about 12%, the largest in the market. This year, FedEx will acquire Watkins Motor Lines, a national LTL carrier that will allow FedEx to offer national (usually known as "long haul") service for the first time.
FedEx Freight's success to date can be attributed to good and complementary acquisitions, a simple strategic vision, and operations that satisfy that vision. Management continues to focus on expanding FedEx Freight. The scheduled Watkins acquisition will result in an immediate revenue increase and is also expected to stimulate regional freight business, as long-haul customers realize they can use FedEx for their regional needs. The most significant obstacle to FedEx Freight's growth is the slowing U.S. economy. Freight, like parcel shipping, is a highly cyclical business.
FedEx Services (5% of total revenues)[5]
FedEx Services (formerly FedEx Kinko's) owns and operates a chain of more than 1,700 storefront business centers around the world. FedEx Services locations offer customers internet access, teleconference facilities, photocopying, printing and FedEx shipping services. FedEx Services earned $1.977 billion in revenue for 2009, which was 5% of all FedEx revenue. The segment was created in 2004 when FedEx acquired the Kinko's chain for $2.4 billion. In June 2008, the company made significant changes in both its structure and expansion plans. FedEx has dropped the Kinko's name and will book a goodwill charge of $891 million. When FedEx bought Kinko's they paid a premium over the book value of its operations, goodwill. To offset this premium paid on the balance sheet, they created an asset. This charge means that they will subtract $891 million from that goodwill amount on the balance sheet. No actual cash will change hands, but FedEx's book value will fall by $2.22 a share. The company has also decreased expansion plans. After adding 300 stores in the fiscal year 2008, they added only 70 in fiscal 2009.[11]
(Read More about FedEx's Key Trends and Forces...)
References
- ↑
- ↑ 2.0 2.1 2.2 2.3 2.4 FDX 2009 10-K, Income Statement
- ↑ FDX 2009 10-K, pg. 20
- ↑ 4.0 4.1 4.2 4.3 4.4 FDX Three Months Ending August 31, 2009 10-Q
- ↑ 5.0 5.1 5.2 5.3 FDX 2009 10-K, Segment Information
- ↑ 6.0 6.1 6.2 6.3 6.4 6.5
- ↑
- ↑ FedEx Trade Networks Services. Retrieved on January 26, 2009.
- ↑ "FedEx Taps China’s Second and Third-Tier Cities", FedEx News Room - China News, November 11, 2007, retrieved 12/30/07.
- ↑ http://www.customersandcapital.com/book/2008/06/air-express-wars-mr-smith-goes-to-holland.html
- ↑ BusinessWeek
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