FDX, UPS: Independent Contractor Expert Call Summary

FDX, UPS: Independent Contractor Expert Call Summary




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Our Take on FedEx Ground & ICs


  • Reasonably Robust: Our expert call with Rich Reibstein largely confirmed that FedEx Ground’s multi-route, multi-employee independent contractor (IC) model is more robust and refined than millions of other IC arrangements.  While it would be difficult to structure IC arrangements perfectly under current law, FedEx has been proactive and restructured ahead of most legislation.
  • Already Restructured:  The FedEx Ground IC structure remains under legal attack and it is a key risk for the firm.  However, FedEx has long recognized the advantages and exposures of relying on IC.  The company has already spent years restructuring its lCs to better conform with the various IC definitions.  Spending and incentives associated with this restructuring depress FedEx Ground’s margins in the mid-00’s.
  • Expect More Legislation:  As State and (eventually) Federal legislation narrow the opportunities for IC labor structures, it is reasonable to expect FedEx to have ongoing legal expenses (including court losses) associated with independent contracting.  In addition, the plaintiffs’ bar appears to smell money in IC lawsuits and is actively seeking them.  However, the FedEx Ground IC model, including the cost and flexibility advantages that it provides, does not appear to be in jeopardy. 
  • Not Unlike Small Franchises:  Franchise arrangements, where a company like McDonalds exerts significant control over the franchisees, are not entirely distinct from multi-route, multi-employee FedEx Ground ICs.  Some might argue that FedEx forced the aggregation of single route ICs into larger contractors and such issues may result in legal challenges.  To us, the form of employment seems likely to be more relevant than the motivation behind it.
  • Other Industries Impacted:  We contacted Richard to better understand the sustainability of FedEx Ground’s labor advantage over UPS.  However, it is clear that other transport and construction industries could be impacted with the growing tide of IC legislation and plaintiff interest.  With approximately 10 million independent contractors in the United States, many other sectors of the economy could be impacted by fines and 30%-40% labor cost increase that separates ICs from full-time employees.  Construction, Transportation and Staffing appear most exposed.  Tighter IC regulation (and tighter labor regulation in general) tends to benefit Staffing companies.


Summary of Expert Call with Richard Reibstein


Independent Contractor Background

  • Independent contractors cost companies on average ~35% less relative to regular workers due in large part to the following major factors:
    • Payroll taxes
    • Unemployment contributions
    • Benefits such as healthcare and 401k
    • Workers’ compensation
    • There has been a huge increase in the number of independent contractors in the past 20 years and we now have over 10 million in the US.
    • In 2007 the US realized it had a tax gap and the government began looking at companies that might be attempting to circumvent the independent contractor laws.
    • Some states put laws in place to crack down on independent contracting.  Massachusetts was the first and others have followed their lead.
    • There have been a number of bills proposed at the national level in the past 4 years dealing with both independent contractor tax and labor issues, but there has not been bipartisan support for them.  I think as we go forward these bills will pass because the tax gap is becoming an increasingly pressing issue.

The FedEx Ground Model

  • FedEx Ground and FedEx Home Delivery utilize independent contractors to make their deliveries because RPS was built on an independent contractor model.
  • At the point when FedEx Ground purchased RPS they were operating much more in compliance with the contractor laws than they currently are.
  • The key difference in the worker-management relationship in an independent contractor model is that management is not supposed to instruct the worker on how to do their job.  They can tell them what to do, but now how to do it. 
  • FedEx has decided to restructure their relationship with Ground drivers.  Drivers are now required to have more than one route, which essentially means that FedEx is attempting to control their independent contractors.  
  • Although FedEx is committed to this direction the states are creating their own laws which have been posing problems for FedEx.
  • For example, FedEx paid $30 million in California because drivers were determined to be misclassified.  A large portion of this payment was legal fees and that is just one example of the hidden costs associated with an independent contractor model for FedEx going forward.
  • Few companies are looking at the writing on the wall because they cannot change their structure easily or inexpensively.  

What to Expect in the Next Four Years

  • More and more states will adopt laws cracking down on companies using independent contractors.  There might be a grassroots movement to start alerting misclassified independent contractors that they should be eligible for benefits.
  • The Federal government may increase the enforcement level because they were recently given a bigger budget by President Obama.  The Secretary of Labor, Hilda Solis, has focused on those industries where misclassification is most prevalent.
  • It is likely that states will begin sharing information in an attempt to coordinate efforts against misclassified independent contractors.
  • Recent federal laws have proposed to eliminate the safe harbor clause because it states that if a company has misclassified a group of workers on accident they can enjoy a safe harbor and avoid penalty.  FedEx has been able to defeat the IRS with this safe harbor clause.




Today we bought Brinker International (EAT) at $32.78 a share at 3:13 PM EDT in our Real-Time Alerts. Hedgeye Restaurants Sector Head Howard Penney got on our Morning Call this morning and was excited about Chilis' new initiatives. Buying consumption on red - we'll sell it on green when the time is right.


TRADE OF THE DAY: EAT - image001


The Economic Data calendar for the week of the 14th of January through the 18th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



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When In Drought

The drought that has plagued Midwestern America and the rest of the country is far from over. New reports show that corn, wheat and other commodities are low in supply, which accounted for today’s pop in the futures market. Simply put: the Midwest needs snow and lots of it. Several feet will be necessary to equate to the amount of rainwater that will make a material difference. Average snow depth across the Midwest for the first 11 days of January was 0.3 inches and that was covering only about 10.4% of the area. Ouch.


When In Drought - Drought 1.8.13


When In Drought - image001

GES: Sentiment Should Be Weaker

Takeaway: $GES is an admittedly unloved stock, but it should be loved less. Some argue it's cheap, but the real EPS power makes it look expensive.

Guess? Is one of the more interesting names to us heading into ICR.  It will undoubtedly be one of those companies where 50 analysts will be crowded around the CEO at the break-out session fighting to glean every last bit of information. But we have no reason to believe that the information will be positive relative to expectations.


To put this into perspective, the stock is up 14% since the trough before the latest quarter and is sitting just 4% (or $1) away from its TAIL line of resistance). On that last print, which was very sloppy to say the least, it was clear that management really has no clue as to why its business is weak. While placing blame on a weak consumer might be accurate, we can point to a host of other companies that are still growing even with a weak consumer.


Also, one notable difference at ICR this year is that GES is without a COO and a CFO – the first time in its history of attending this conference where that will be the case. So let me get this straight…the company just lost two of its best players (with the simultaneous and still mysterious resignation of Prince and Secor), and the remaining bench is left trying to bridge the gap between macro and a micro problems.


In looking at sentiment, one might think that these concerns are already baked into the stock. After all, sentiment (as measured by our Sentiment Monitor) is sitting near a historical low of 20 on a scale of 100. (i.e. this says that sentiment is bearish, which when exaggerated is a contrarian indicator for the stock).

GES: Sentiment Should Be Weaker - ges sentiment


But we don’t think so, and we think it comes down to earnings.

1)      We need to assume that every business unit accelerates in order to hit the company’s 4Q guidance – which they issued at a time when they admittedly did not know what was driving their business down.

2)      We’re at $1.65 next year versus the consensus at $2.32. Yes, it looks cheap at 10.8x consensus estimates. But it’s at 15.2x our number.

3)      Keep the current multiple steady on our estimate, and you get a $17.75 stock – that’s 30% downside from where it is today.  


Keep in mind that GES was one of the companies that came out an announced a special dividend for the 2012 calendar year -- $1.20 per share, or $110mm. This was one of the more self-serving moves we’ve seen, as the co-founders own 30% of the stock and drew better than $55mm in dividends for the year. That’d be fine as it pays other shareholders as well, but the reality is that this company is likely to generate free cash flow this year of only $125mm.


Even though the company is not levered, it hardly seems prudent to pay up for a special dividend when you’re looking at an economically cyclical business that depends on hitting fashion trends and the company just lost leadership by way of departures in the COO and CFO ranks. Shareholders probably liked the dividend, but we can’t quite stomach it from a risk management perspective heading into an uncertain 2013.


Of course, the disconnect would be that management does not view 2013 as a year where there is risk to earnings, while we do. Therein lies our comfort level with our short case.


The near term risk to the upside is that the company is one press release away from announcing an external management hire that gets people all excited. We don’t think that one person can immediately make a big difference here – especially given that whomever is brought on will need to prove (as Carlos Alberini did) that he or she can manage both the shareholder and family agendas simultaneously, which is tough to do. But we need to at least acknowledge the risk.




Note: As it relates to earnings, GES is currently sitting in a very bearish part of its SIGMA chart, with inventories and margins both working against the company.

GES: Sentiment Should Be Weaker - gessigma

Corn Supplies Get Tighter

Not a lot of corn out there right now

Today’s WASDE (World Agricultural Supply and Demand Estimates) didn’t tell us anything that we didn’t already know – yields ticked up a bit from December (123.4 versus 122.3 bushel per acre) and ending stocks were down at 602 MMT versus 647 MMT in the prior report and expectations of 652 MMT.  The 602 MMT is a historically tight number as we head into the planting season.  I wouldn't read too much into the yield increases, as that number tends to get fudged a bit.


In a bit of a surprise, both Argentinean and Brazilian corn production estimates were raised – we only saw half of that coming and expected a move in the other direction in Argentina.

The bottom line is that there is not a heck of a lot of corn out there versus historically levels, and the snow situation in the Midwest remains unhelpful – average snow depth across the Midwest for the first 11 days of January was 0.3 inches and that was covering only about 10.4% of the area.  We need to start getting some snow.


Corn Supplies Get Tighter - Drought 1.8.13


Have a good weekend,




Robert  Campagnino

Managing Director




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