FedEx Raises Rates: What Investors Need to Know

What's happening in the headlines can affect you as an investor. Here's what's going on, what you need to know, and what you should expect.

The cold, hard facts
Shipping giant FedEx (NYSE: FDX) has announced on its website that it will raise some of its shipping rates in 2012. Among the rate hikes to take effect on Jan. 2, 2012, are a 5.9% average hike on FedEx Express package and freight rates and a 5.9% average increase on FedEx Ground and Home Delivery services.

Some context
If your first thought was that FedEx is doing this to offset fuel costs, it's a reasonable one, but try again. Actually, the company is now in the process of reducing an existing fuel surcharge. Why the rate hike, then? "The truth is," Art Hatfield, an analyst with Morgan Keegan, told Marketplace, "FedEx is busy."

Transportation markets are tight right now, and FedEx is raising rates for the luxuriously simple reason that it can. The company says it also needs to charge higher rates so that it can hold on to good employees.

Now what?
A company's gross margin indicates brand strength and pricing power. FedEx's gross margin on a 12-month trailing basis, or TTM, is a solid 24.9%. Gross margin TTM for rival UPS (NYSE: UPS) is 23.7%. FedEx can still afford to raise prices, however, because it and UPS are the two giants in the store-to-door parcel delivery industry, and if both are busy, especially with the USPS struggling, there's room for either to up prices.

We’ll have to see how this affects online retailers like Amazon.com and Barnes & Noble, which have gotten into the habit of promising their customers free shipping on orders over $25. For investors in FedEx, however, I would expect higher profits. Merry belated Christmas, then, courtesy of a solid gross margin and a tight transportation sector.

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