Is FedEx's Cash Cow at Risk?

Why the winds of change are blowing against FedEx's most profitable segment.

Mar 19, 2014 at 5:59PM

Shares of FedEx (NYSE:FDX) rose slightly today, after the company reported a mixed bag of news for its fiscal third quarter. While the company saw particularly heavy volume over the holiday season, the same harsh weather that ate into many retailers' profits this winter also hit FedEx, cutting into its operating margin and affecting the company's bottom line.

More broadly, however, many on Wall Street are wondering how shipping companies like FedEx and UPS (NYSE:UPS) are going to adapt to the ongoing shift in consumer demand, as more and more consumers want next-day shipping, or even same-day shipping. FedEx's high-margin business, FedEx Express, which uses next-day shipping via air to meet demand, is the company's bread and butter and most profitable segment. But, in order to afford the costs associated with such short shipping times, many companies are electing to build distribution centers near major metropolitan areas to take advantage of shipping via ground to consumers for next-day orders, which cuts out the middleman -- FedEx's cash cow, it's air-shipping service.

FedEx isn't just sitting back idly while this trend occurs. In this video from Wednesday's "Stock of the Day", host Mark Reeth and Motley Fool industrials analyst Blake Bos dig into the business of FedEx, discuss how the company is adapting to shifting consumer demand, and highlight the most important thing investors need to watch about this company.

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Blake Bos has no position in any stocks mentioned. Mark Reeth has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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