FOOL ON THE HILL
An Investment Opinion
Don't Forget FDX in UPS Hoopla Warren Gump (TMF Gump)
November 9, 1999
The pending initial public offering (IPO) of United Parcel Services (NYSE: UPS) has gathered a lot of attention this week, with the price range raised to $47-$49 per share, up from prior estimates of $36-$42. If successfully completed, this $5 billion+ deal with become the biggest U.S. IPO ever, topping the Conoco (NYSE: COC.A) debut earlier this year.
As the world's largest package delivery concern, UPS will instantly become the premier stock to own in the sector. In fact, I would guess that many shareholders of FDX (NYSE: FDX), the owner of Federal Express and RPS, have sold or plan to sell some of their FDX shares to raise cash to purchase some UPS stock. This decision may be a good one, but I would caution people from throwing FDX out in the wind.
Almost everyone knows that FDX's (NYSE: FDX) FedEx unit started the express delivery business with its launch in 1973. Since that time, the company has continued to innovate, regularly using technology as a weapon to increase efficiency and provide customers with additional services. The company was one of the pioneers in bringing computers aboard each of its vehicles to track package shipments. Now it is setting itself up to be a contender in the wired, global marketplace. Two key initiatives that should help the company prosper are efforts to build up international operations and moves into the supply chain management business.
In the past year, FDX's stock went through a boom inspired by high expectations for additional Internet business, followed by a bust caused by lower earnings estimates. From $27 a year ago, the stock reached more than $61 in the middle of May at the recent peak of Internet hype. With today's closing price about $43, the stock has given back a good portion of those gains. The realization that FDX is still subject to the vagaries of an industrial economy is the primary reason for this turnabout.
FDX's earnings for the first quarter of fiscal 2000 (a period ending last August) rose only 4% to $0.52 per share. This growth fell well short of the 17% recurring earnings growth experienced during fiscal 1999. One of the main culprits for this slowdown was a 29% increase in fuel prices, which knocked $0.05 per share off of reported results. The company also warned with this announcement that oil prices at the current level would knock about $0.30 off its earnings for the year. While analysts knew that oil prices were rising, they didn't fully appreciate the magnitude of the price swings. Along with earnings estimates for the current year, analysts cut price targets and their recommendation on the stock.
Compounding problems for the company in the eyes of analysts is the fact that the company hasn't experienced an explosion in package volume from Internet commerce. U.S. volume growth in the first quarter was 3%, the same rate experienced throughout the past year. At first glance, it might seem strange that the company hasn't seen a volume surge. Considering the company's key markets, however, the situation isn't quite as surprising.
FedEx (and RPS) focuses on serving the business-to-business marketplace, not the business-to-consumer market. It has taken this approach because of the high expenses of serving every address in America. To profitably compete in this market, you need to have huge volumes to cover the overhead. With stiff competition from UPS and the United States Postal Service, gathering that volume will be a challenge. The company is testing business-to-consumer deliveries in Pittsburgh to see if it can successfully enter this market, but it won't do so unless the move is economically feasible.
The lack of plans to imminently enter the business-to-consumer market doesn't mean FDX doesn't plan to benefit from the emergence of the Internet. The company actually has very ambitious plans to profit from the increased commerce traffic and falling boundaries of commerce. Its most aggressive effort is to increase the business of its logistics group, which helps companies manage their global supply chain.
Before discussing endeavors, it needs to be pointed out that FDX's international operations are turning out to be one of its crown jewels. While UPS is far larger than FDX in the domestic marketplace, FDX records more revenue than UPS in the international marketplace, which is the fastest growing area of the business. FDX's first quarter volume for International Priority Mail shot up 12%, representing an acceleration over the 9% volume growth achieved last year and far above domestic shipment growth. To support this growth and expand services, FDX recently opened a $200 million facility in Paris.
And now, back to supply chain management. More companies are relying on delivery services to store and ship products when they're needed with the continued movement toward just-in-time methods. The topnotch quality of FDX's information systems and the global reach of its delivery system make it a strong contender in this field. The first major announced customer for FDX's logistics group is Cisco Systems (Nasdaq: CSCO). The networking giant reportedly selected FDX because of its willingness to adapt to its needs and the depth of its international infrastructure. Logistics is currently a minute part of FDX's revenues and profits, but it has the potential to become the next big growth avenue for the company if the company does things right.
I don't mean for this article to berate UPS in any way on the launch of its public offering. My purpose in writing this article is to remind people that while UPS is a terrific company, so is FDX. The market will likely treat UPS as a golden child and drive its stock much higher than its lofty initial offering price. Some investors might want to take a step back from that excitement and consider FDX as an alternative choice. After all, FDX and its excellent team of people have figured out how to siphon $17 billion in annual sales away from UPS over the past 25 years.