THE HEDGEYE EDGE
We believe FedEx has the ability to improve margins in its Express division. With a large revenue base at a 30-year low in margins, the Express division could be a value driver over the next two years. A tie-up with TNT could drive additional value for FDX shareholders, in our view.
Further, we see FedEx Ground as a winner in the US ground parcel market. That division offers exposure to fast growing e-commerce package volumes. Finally, FedEx Freight has been surprisingly profitable and may benefit from a rebound in US construction activity.
INTERMEDIATE TERM (the next 3 months or more)
Shares of FDX sold off sharply following its fiscal third quarter earnings release. Markets responded negatively to a sequential decline in Express margins, even though the restructuring does not start until this (fiscal fourth) quarter. A rebound from what we see as over-sold levels could support the shares near-term.
Management has commented that we should see Express margin improvement in the fiscal fourth quarter. The macro environment appears likely to be more supportive of Express services demand. Should the company deliver in fiscal 4Q, the shares may begin to price in improving margins ahead of their actual acheivement.
LONG-TERM (the next 3 years or less)
FedEx is a long-term position, in our view. Reorganizing the Express division is a slow process, in part because high service levels cannot be disrupted as adjustments are made. Cost reductions build through FY2016 and the long-run result may surprise to the upside. Margins at UPS and DHL are meaningfully higher, in our estimates, and we see no structural reasons why FedEx Express cannot match its peers. A TNT tie-up could also facilitate restructuring, in our view. FedEx Ground has been taking market share from UPS in US ground parcel for over a decade, but those gains may well reach a tipping point in coming years.