FDX: Deutsche Post Shows FedEx Express Can Get There
- Industry Likely Improving: In our November 2012 Express & Courier Black Book, we highlighted what we thought was an inflection point in the Express industry. Deutsche Post’s report suggests that the environment for the integrators is likely improving. FedEx reports on March 20th, so a positive read on the environment is encouraging. DHL Express reported fourth quarter organic revenue growth of 6.8% - not bad for a quarter in which the US and Eurozone were apparently in contraction.
- Americas & Asia: Deutsche Post commented that the best growth “in percentage terms” was in the Americas, where FDX has the dominant market presence. It does not appear to be a market share gains by DHL Express, but rather market growth. In addition, Deutsche Post suggested that volumes in Asia on the freight forwarding side picked up in the back end of the year, another important time definite market for FedEx. They said that airfreight was still down YoY, but less so. We have seen better Asia air cargo data, as noted here.
- Deutsche Post Was Able To Fix Its Express Margin: The Express industry is structured for good returns, in our view. The industry is increasingly consolidated with high barriers to entry and rational competitors. Deutsche Post focused on improving express margins, as described in early 2011: “On Express margins, it is our expectation that margins will continue step by step to increase over time. Our aspiration, as we talked about in the Capital Markets Day, is we get at least equal to industry leading margins ….” –Lawrence Rosen, CFO 3/10/2011. DHL Express was able to execute on this restructuring and achieve much stronger margins. DHL Express also started in a much worse state than FedEx Express is now starting, in our view.
- What FedEx Expects: Compare DHL’s management comments to those FedEx management on FedEx Express’ margin expansion prospects “ I think it will be a combination. There'll be small stair-steps, but it'll mostly be momentum that will drive this. Again, we are talking about thousands of people here. So, as we reorganize around that with a very limited backfill behind that, we have to space these folks out. So, there'll be May, then there'll be some August, and then there'll probably be some November and then there'll be some in next May, and I don't have clear visibility of that except I know where we'll be in fiscal 2015 with pretty good certainty.” – Alan Graf 12/19/12 Restructuring at FedEx Express is likely to be a multi-year process, but the leverage on a large revenue base should make it worth the wait.
- Matching Competitors: We put out our estimate for Deutsche Post’s 2012 Express margin in our Best Ideas slide deck last Wednesday. It turns out to have been about 20-30 basis points higher, with a portion of that beat driven by a stronger in the fiscal 4Q. (note: adjusted for one-time benefits)
- Asia Pacific Express Slightly More Consolidated: Deutsche Post believes that it gained about four points of market share in Asia over the past couple of years, with that gain coming from the “Other” category and potentially TNT. If TNT is losing share in Asia, it might accelerate FedEx’s decision-making on a potential transaction. If TNT is deteriorating, the rationale for buying sooner might be stronger. We would highlight that the list of countries included in the initial sample is much narrower, so Deutsche Post appears to be comparing apples and oranges, leaving it difficult to read much into the share shift.
- Is FDX Losing Share in Americas to UPS?: At first, that is the way the Deutsche Post data look. However, the 2012 DHL data includes a number of additional countries, including Brazil, Argentina and Colombia. FedEx did note that “In the U.S. Express volume share segment, we retain a clear lead over the competition. And while our volume share was down last year, on a year-over-year basis, again, that was primarily due to our yield management activities” Michael Glenn 10/10/12. We suspect any shift has been fairly small, consistent with the US share chart from the FedEx analyst day and that most of the shift in the charts has been due to the inclusion of additional countries in the Americas sample.
- Strategy in Couriers: We continue to believe that FDX offers some of the best upside in the Industrials sector, with fair value per share in our base case model between $120-$150 and a bullish model at $180. As discussed in our November 2012 Black Book, we also believed Deutsche Post itself provides excellent exposure to the improving trends in the Express & Courier industry. Our base valuation range for Deutsche Post of Eur 15-Eur 20 was achieved very quickly since then and the risk/reward appears less favorable at these levels. We would prefer FDX over DPW GY and UPS at these levels.