Does Bill Ackman Have FedEx Stock in His Sights?

FedEx (NYSE: FDX  ) has outperformed the market this week, rising from around $99 at the end of last week to highs above $106. The main justification for this rise has been rampant speculation about whether FedEx stock will be the next target of hedge-fund manager Bill Ackman, who has had many high-profile "activist" investments, including successful runs at McDonald's and General Growth Properties along with underperforming investments in Target and J.C. Penney.

I have no inside information on whether Ackman really is interested in FedEx. However, while having an activist investor onboard could help accelerate FedEx's restructuring and unlock more value for shareholders, FedEx stock is likely to outperform the market over the next few years even if Ackman isn't involved. Shareholders may have a wild ride for the next few months, but long-term investors are likely to do well with FedEx, regardless of the short-term gyrations.

Activist speculation
On Monday, activist investor Bill Ackman -- who runs Pershing Square Capital Management -- announced that he was launching a new $1 billion fund to invest in an unnamed large-cap American company. According to a letter sent to potential investors by Ackman, the business is "simple, predictable, and free-cash-flow-generative and enjoys high barriers to entry." These are all hallmarks of a great investment opportunity.

Not surprisingly, investors and the financial press immediately began trying to identify Ackman's most likely targets. By Tuesday, two names were getting most of the attention: FedEx and security firm ADT (NYSE: ADT  ) . Both seemed to fit most of the criteria Ackman identified.

That said, neither match is perfect, and some analysts have argued strenuously that Ackman probably isn't buying FedEx stock. While the air cargo market has high barriers to entry, there is still plenty of competition between FedEx, UPS (NYSE: UPS  ) , DHL, and others. The other criteria are also vague enough to leave plenty of doubt about Ackman's plans.

Does it really matter?
When all is said and done, investors shouldn't lose any sleep wondering whether Ackman has been loading up on FedEx stock. The company remains healthy, which is the most important thing for investors. Of its two main businesses, FedEx Ground has been growing rapidly for a long time, becoming a viable competitor to UPS in the process. FedEx Ground has gained market share for an amazing 54 consecutive quarters! That growth is expected to continue, particularly because of the rise of e-commerce.

Meanwhile, FedEx Express has essentially saturated the air cargo market, but it continues to grow modestly as global trade increases. Moreover, the company's ongoing restructuring program is designed to reduce costs in the Express division by more than $1.5 billion, boosting margins. This will produce a modest earnings benefit in FY14 and a significant benefit in FY15.

If restructuring leads to robust profit growth at FedEx for the next few years, FedEx stock should be able to break out of its recent rut with or without an activist investment. Moreover, having activist investors on board is not always a good thing. Sometimes, activist pressure leads to more shareholder-friendly policies, but it can also lead to distracting proxy battles that divert management's attention from the business.

Foolish bottom line
It's very risky to invest based on rumors about what other investors are planning to do. In many ways, you are better off doing your own homework and finding great businesses with growth prospects that are available for attractive prices. FedEx stock seems to meet those criteria. If the recent market speculation tells us anything, it's that many people think FedEx could be a very good investment opportunity.

It's possible that FedEx stock will drop in the near term if it turns out that Ackman has targeted another company instead. However, for long-term investors, FedEx will be a good investment as long as it can execute on its cost reduction goals over the next two years. FedEx's management team has already laid out a strong business plan, and if it follows through on that plan, the stock should perform well with or without a boost from Bill Ackman.

FedEx is one company that stands to benefit from global economic growth, but it's not the only American company looking abroad for profit. The Motley Fool's special report "3 American Companies Set to Dominate the World" takes you behind the scenes to look at several other companies that are increasingly looking to foreign markets for growth. Click here to get your free copy before it's gone.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2536379, ~/Articles/ArticleHandler.aspx, 10/1/2014 10:38:25 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement