FedEx: Limited Margin Growth and Challenging Business Environment (NYSE:FDX) – Advice Eating

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thesis

Fedex (NYSE:FDX) is a world-renowned logistics company providing transportation, e-commerce and business services. The business segment includes FedEx Express, FedEx Ground, FedEx Freight, FedEx Services and FedEx Office.

FedEx has shown itself well Top-line results in latest earnings call for Q3 2022. Total revenue is $23.6 billion, up 10% year-over-year.

Despite the positive results for the third quarter of 2022, several factors could hamper the company’s growth. These factors include the ongoing impact of COVID, the tight labor market, the ongoing conflict between Russia and Ukraine, supply chain disruptions, high energy prices and inflationary pressures.

FedEx’s main competitors include United Parcel Service (UPS) and Amazon (AMZN).

1. The aftermath of the pandemic

During the pandemic, the job market has been intensely competitive due to labor shortages and rising labor costs. The shortage of labor has caused delays and disruptions in logistics. However, as the situation at omicron has improved and countries and workforces are slowly picking up steam, this has certainly raised some hopes that the issue and delay can be resolved.

Despite the easing in the ‘physical’ labor market and the availability of the labor pool for recruitment, wage pressures remain a concern in the medium term. The recent conference call mentioned that the job impact is estimated at $210 million year-over-year. As the tight labor market situation eases, we hoped this would have a positive impact on the company’s operations and potential financial improvements.

With the rising COVID cases in China, restrictions have been reinstated in several parts of China. This has resulted in supply disruptions or, in some cases, a temporary service disruption for the company. The negative impact from China will impact the global supply chain through reduced actual supply and its impact will be felt beyond China and Asia.

From the company’s perspective, there are a few opportunities to consider – In the European region, operational efficiencies and sales figures can be improved. In North America, FedEx’s ground business needs to capitalize on revenue growth and work toward margin improvement.

There are changes that the current challenges, such as Factors such as labor shortages, wage pressures and energy price volatility can accelerate the pace of transformation of logistics innovation with robotics and advanced computation. FedEx has tested autonomous vehicles in the past and plans to test autonomous drones. While we can never predict if the company will be the winner of these future changes, they appear to be heading in the right direction to capitalize on the opportunity.

2. The war has created an even more difficult business environment

The war will damage the world economy. Among the vulnerabilities, it has pushed oil prices higher and further weakened the global supply chain. Although the company is suspending all services in Ukraine, Russia and Belarus and mentions that the impact on profits from that region is not material, there are other inevitable indirect business impacts due to the interdependence of global economies.

The price of energy is one of the cost components of the company’s operations and accounts for about 5% of the operating costs. The rise in energy prices is being attributed to multiple factors, including a surge in demand from the post-pandemic, the Biden administration’s domestic energy policies, and the ongoing war between Russia and Ukraine.

The company regularly reviews its fuel surcharge to maintain its base shipping rate and adjusts the surcharge to cover increases in fuel prices. This is a common practice to support competitive delivery rates while providing comprehensive services to their customers. From a consumer perspective, this increase in shipping costs will be borne by the consumer.

Consumer confidence falls with inflationary pressures and higher interest rates (future). With wage growth rigid compared to rising prices for goods and services, this will result in weaker GDP and lower consumption and spending. This, coupled with squeezed top-line growth and concomitant margin squeezes due to remnants of pandemic effects on labor and energy costs, will present a challenging environment for the company.

3. Although e-commerce growth translates into more robust revenue growth, there’s limited margin growth

The COVID-driven e-commerce revenue growth has allowed logistics companies to accelerate revenue growth years earlier than expected. However, if we look at 2021-2022, we see only 3% year-over-year margin growth. This raises a serious question as to whether the logistics giants will benefit from e-commerce growth. Limiting margin and cash flow growth is compounded by competition between existing players, an operating model that relies on people and fuels over technology, and threats from new players and new technologies (e.g. Amazon’s direct logistics with unmanned technologies ) driven. .

rating and opinion

This is my price range for FedEx:

FDX Stock Rating

Financial model of the author (author)

FedEx is a highly recognizable brand name and has built its niche segment over the years. FedEx announced a $5 billion share buyback program last year (10% of current market cap, or about 2% per year for a 5-year program). Coupled with the 1.5% dividend yield, the annual yield for the shareholder is a reasonable 3.5%. However, given the challenging macroeconomic situation and low expectations for margin and cash flow growth, I see the price as its full value but not attractive to enter a long position.

From a long-term perspective, it’s still interesting to monitor the company’s plan for autonomous vehicles and drone deliveries and whether the company can capitalize on opportunities and improve process efficiencies. From long-term fundamentals, I see this capitalization as an inevitable mandate to compete against existing competitors and new entrants like Amazon for the foreseeable future.

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