As announced this week, rates for each of FedEx Express, FedEx Ground, FedEx Home Delivery, and FedEx Freight services will all be rising "by an average of 4.9%." FedEx SmartPost rates will also be going up. All of these new rates go into effect on Jan. 4, 2016.
Additionally, FedEx said it will increase surcharges for "unauthorized packages" -- FedEx-speak for packages that go "off the charts" of its published maximum spatial or weight dimensions -- by an as-yet-to-be-determined amount, beginning Nov. 2 of this year.
And all of this, of course, is in addition to the big changes FedEx implemented earlier this year on how it prices delivery of low-weight but bulky packages that consumers have begun having shipped to them -- such as six-month supplies of paper towels and toilet paper delivered by Amazon Prime. That rate hike came as even more of a shock than this week's announcement, as FedEx's introduction of "dimensional pricing" on bulky, low-weight packages equated to price hikes of as much as 21% to 76%.
'Tis the season
Dimensional pricing was a bit of a one-off, an emergency measure FedEx implemented to deal with a change in consumer shopping (and shipping) habits. But like clockwork, FedEx (and its archrival UPS (NYSE:UPS)) has a habit of announcing annual rate hikes around the fall season, and on pretty much all of its services. It doesn't matter much what state the economy is in. In good times and in bad, FedEx rates only go up.
The rate hikes generally take a few months to kick in, to soften the blow and allow customers to get accustomed to the new normal before having to sign the check. But a hike's a hike, and the rates rise relentlessly.
This can be a bad thing or a good thing, depending on how you look at it.
For whom the toll bells
From the customers' perspective, rate hikes are rarely a good thing. They mean higher prices for the same service, plain and simple. And for consumers who've endured years of stagnant wages, FedEx's seeming imperviousness to the laws of economics, and its interminable price hikes over and above the rate of inflation, must sting.
E-tailers who depend on FedEx, UPS, and the USPS to get their goods into customers' hands, often offering to bear the cost of shipping in order to make a sale, will feel an even more immediate pinch from the price hikes. They'll be faced with the choice of either eating the rate hike or incorporating it into the prices they charge for their goods -- potentially angering customers and hurting sales.
For FedEx shareholders, however, this latest rate hike is just another affirmation of the depth and breadth of FedEx's moat. With only two major rivals to contend with (UPS and USPS), and both of those historically likely to raise their own rates in tandem with FedEx, FedEx has proven over the years that it can raise rates predictably, year in and year out, without much fear of scaring off customers. In a very real sense, FedEx is playing to a captive audience.
As a result, when S&P Capital IQ predicts that FedEx will grow its earnings by 13.5% annually over the next five years, you can depend on rate hikes to provide more than one-third of that growth -- guaranteed. (Although from that perspective, UPS appears to offer an even better guarantee. Five-percent-ish annual rate hikes cover nearly half of UPS' projected long-term growth.)
The upshot for investors
Did that parenthetical sound like a cheap shot at FedEx, and a point in favor of UPS? Well, it was and it wasn't.
Consider: The same week FedEx announced its price hike, it also announced disappointing earnings that stood in stark contrast to UPS' recent earnings beat. Turns out, while analysts expect faster earnings growth from FedEx (13.5%) than from its rival (11%), the fact that both companies have a "lock" on 5% of that growth (from earnings hikes) means that in any given year, there's more risk of FedEx failing to hit its mark than there is for UPS.
When you consider further that UPS is selling for just 23 times earnings versus FedEx's 40 times P/E, and that it pays a 3% dividend yield versus FedEx's mere 0.7%, the real question today isn't: "Why is FedEx charging customers more today?" Instead, we should be asking: "Why are investors paying more for FedEx, when UPS is the better bargain -- and the safer stock?"