It's easy to quickly conclude that FedEx Corporation (FDX +0.58%) is just a smaller version of United Parcel Service (UPS +0.28%) and that the two companies are essentially interchangeable, except for FedEx's greater emphasis on express deliveries. However, a closer look at the facts reveals some key differences. Here's a look at some things that might make you think differently about FedEx.
1. FedEx isn't just express
As the name suggests, FedEx is best known for its express deliveries, but in the last decade, it's made more income from its slower, less expensive ground deliveries than it has from its express segment. Adding up the total segment operating income from express in the last 10 years produces $15.4 billion compared to $16.3 billion from ground.
As you can see below, ground took the lead following the recession of 2009 -- as customers shifted to slower, less expensive deliveries -- but express is currently the biggest profit generator again. The reasons for this are discussed elsewhere. Going forward, the express segment is going to drive profits, not least because the integration of TNT Express is expected to improve express operating income by $1.2 billion to $1.5 billion in 2020 from 2017.
Data source: FedEx Corporation presentations. Millions of U.S. dollars. Chart by author.
Nevertheless, it's worth noting that ground still contributes relatively, and absolutely, much more than it did a decade ago. FedEx is not just about express.
2. FedEx is not as productive as UPS
You wouldn't think it by looking at the share price movement in the last few years -- FedEx is up nearly 42% in the last three years compared to a mere 9% gain for UPS -- but the latter is consistently the more productive company. As the chart below shows, across a raft of metrics, UPS tends to generate more income and cash flow from its assets and more return on invested capital and capital employed.
FDX FCF to Assets (TTM) data by YCharts.
The big difference between the two in recent years, and why FedEx has outperformed UPS, is that FedEx's network has dealt much better with strains imposed on it by burgeoning e-commerce growth, particularly during peak demand periods in the holiday season.
3. FedEx operates separate networks
In contrast to its rival, FedEx operates separate air and ground networks. While this is probably why it's less productive than UPS, it's also arguably why FedEx found it easier to deal with demand surges. At least that's how FedEx's management sees it.
The separate networks are a consequence of the company's historical focus on express deliveries, and it's proved beneficial in recent years. In truth, both companies are having to ramp capital expenditures in order to service e-commerce growth , but it's been much more of an issue for UPS, and FedEx's rival has been punished by investors due to its unexpected increases in capital expenditures.
4. Before TNT Express, FedEx was a relatively small player in Europe
Based on DHL estimates from a couple of years ago, it had around 40% share in what DHL calls the time definite international market share in Europe. UPS was seen as a distant second with around 25%, with TNT Express at 12% and FedEx at 10%. In fact, FedEx's relatively low historical market share in Europe is a large part of the reason why European Union regulators approved the FedEx/TNT Express acquisition when UPS's move for TNT was stymied in 2013. FedEx/TNT Express is not seen as a creating significant competition concerns by the EU.
All told, FedEx's move for TNT Express creates an opportunity to significantly expand its European presence while generating cost synergies and raising margin at TNT Express.
FedEx Corporation isn't just about express deliveries. Image source: FedEx Corporation.
What does it all mean?
Putting it all together, a picture emerges of a company whose mid-term earnings drivers aren't just its most easily recognized operation, namely express services in the U.S. In fact, the following three factors are key to its future:
- Profitable and productive e-commerce delivery growth within its ground segment
- Productivity improvements while maintaining its separate air and ground network structure
- Successful integration of TNT Express and expansion in Europe
In short, FedEx's future prospects are down to a lot more than just FedEx Express in the U.S.
