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FDX: USPS Contract Adds to Positive Optionality

Takeaway: The USPS contract adds relevance to the Express restructuring and removes an overhang. We expand on the Express restructuring option view.

FDX: USPS Contract Adds to Positive Optionality


  • USPS Contract:  The USPS has a strong union.  In the 1980s and 1990s, the USPS and UPS often clashed, and there are probably many postal employees still around who remember the hostility.
  • Switching Costs:  As we noted here, companies servicing government contracts adequately usually keep the work.  Switching suppliers is riskier and more time consuming for government employees than sticking with a current relationship.
  • Downgrades Ahead of USPS Decision:  We wonder whether recent sell side downgrades were partly trying to front-run what seemed like a potential contract loss (UPS was generally positive on their prospects in our conversations, in our view).
  • Margin May Be Lower – For Now:  We do not have a good estimate of the margin attached to the new contract.  Most government contracts are to some extent based on costs, so that may add more relevance to the prospective FedEx Express cost reductions.
  • Express Restructuring Call Option:  As we have written before, it is not a stretch to view the current FDX market valuation as providing a “free” option on the success of the FedEx Express restructuring, in our view.  We think the values of FedEx Ground and FedEx Freight can be summed to explain most, all, or more than all of FDX’s current valuation.  We can critique/trash the table below as well as anyone.  We do not like sum of the parts comparable company analyses for a number of reasons – contact us if you want a list.  We also do not like selecting point multiples for a number of reasons, such as the tendency of analysts to select multiples that fit their own narrative.  We don’t even like the kinds of multiples we have the data to use in this analysis (i.e. EV/EBIT).  With those caveats, we present such an analysis below just to illustrate a reasonable view supporting the Express optionality argument.  We know the table is not precise, but think it provides a generally on target way to think about FDX.  We also think that leases are not a relevant factor in the analysis – ping us for those details if you are interested (for example, see aircraft fleet composition for FDX and UPS – owned, chartered, short-term lease or long-term operating lease).


FDX: USPS Contract Adds to Positive Optionality - tt1

LO -Better Pricing, Better Profit

Lorillard is the second of the domestic cigarette manufacturers to report, and the results are obviously consistent with RAI’s – weaker volume, better pricing and profitability.  We still aren’t seeing a whole lot to do in the domestic names at this point.


What we liked:

  • EPS ahead of consensus ($0.66 vs. $0.64)
  • Solid increases in net revenue per unit (+3.6%) and operating income per unit ($4.47)
  • Continued good performance from the electronic cigarette segment  - $50 million in revenue and $7 million of operating income
  • Newport volume declined only 1.6% in the quarter, outpacing the industry by a wide margin, driving total volume declines of 2.3% in the quarter
  • New $500 million share repurchase program (announced on March 8th) keeps “creeping LBO” trend going

What we didn’t like:

  • Volume decline was against easiest comparison of the year
  • Increase in revenue per unit (pricing) was against easiest comparison of the year, Q2 and Q3 are more difficult
  • Per unit operating income comparisons get more difficult in the next two quarters as well
  • Sequential decline in electronic cigarette segment profitability (same level of operating income as in Q4 on $11 million increase in sales


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

Corn Getting Clobbered

Corn is down -26% from the peak of the commodity bubble (aka the Bernanke Top) that occurred mid-September 2012. Though the commodity caught a slight bounce this morning, it continues to get clobbered along with oil, gold and the rest of the agricultural commodities due to a strong US dollar that's poised to continue to appreciate in value. Year-to-date, the Teucrium Corn Fund ETF (CORN) is down -11.4% and sinking. 


Corn Getting Clobbered - CORNETF

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

VIX: Slice And Dice

The S&P 500 made a move to the upside yesterday after the AP Twitter hoax was over and done with, breaking through and holding above its TRADE line of resistance at 1557. In turn, volatility (VIX) took a nose dive and fell below our TRADE support line of 14.82. The VIX is quite capable of going lower and we would not be shocked if we saw it dip below the 11 mark if and when the S&P 500 is above 1600.


VIX: Slice And Dice - YTD VIXSPX


In preparation for RCL's F1Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • "Clearly, we view the performance of European itineraries as the largest swing factor in our projections."
  • "Even though the economies in the U.S. and in places like Germany and France still aren't... great, it's really the weakness in Southern Europe that is keeping our yields from truly exciting growth."
  • "It's particularly interesting to note how well both Australia and China have held up. Both are looking towards flat to higher yields despite really very large capacity increases and in the case of China, that's in spite of the impact from the territorial dispute with Japan."
  • "While the wave the season is off to a promising start in most markets, we've seen a significant deterioration in demand from Spain. All indications suggest the continued challenging operating environment in Spain for an extended period of time. This has resulted in significant changes in our plans and expectations for the brand."
  • "As of today, our total booked load factors and booked APDs are slightly better than at the same time last year and better than this point in time in 2011."
  • "U.S. source business is up significantly versus the same period last year. Asian and Australia bookings have more than kept pace with the added capacity we have placed in both markets. With the exception of the UK and Spain, Europe has been pretty solid."
  • "The UK has been disappointing from a volume standpoint, but pricing is above last year."
  • "At the itinerary level, the Caribbean will account for 44% of our 2013 capacity, which is a 4% increase from last year. We are seeing solid booking trends for this product group, and based on what we know today, we expect a record year for yields in the Caribbean."
  • "Asia-Pacific will account for 10% of our capacity this year, which is an increase of about 45%. Our booked load factors look strong for sailings in the first half of the year, although pricing is behind a year ago. Overall, we expect yields to be about flat for this region despite the large capacity increases."
  • "Alaska represents about 4% of capacity, and early bookings are looking good with both load factors and pricing running higher than a year ago. The remaining 15% of our inventory is spread across many other products, including South America, Bermuda, Panama Canal and Transatlantic itineraries. In aggregate, load factors are higher than last year for these products, with pricing running slightly ahead."
  • "Europe represents 27% of 2013 capacity, down 3.2 points versus 2012 against the backdrop of the Arab spring in 2011 and both industry and macroeconomic adversity in 2012, we expect the yield increase in 2013 relative to both years. Northern European capacity for the industry and the company are substantially up and our year-over-year yield expectations are lower in the North than they are for the Eastern and Western Med, where our capacity is down in each sector for the second consecutive year."
  • "We are in the midst... of the marketing investments that we are making, but we also both on capital and on the P&L, we're doing a lot of investment in IT right now. We're working a lot with our websites, our core reservation system, our ability to do a much more intuitive presentation to our customers as well as be able to do a lot more revenue management at a more granular level. Those are benefits that have begun to start coming in, but they will also snowball over the next couple of years. So, we've included some benefits this year in our revenue, but I think it's going to be 2014, 2015 that we really hope to get the biggest games out of that."
  • "Overall, some of the areas that were helpful to us where shore excursions and beverage. Also in general, being more present in the Asia-Pacific region is good in terms of the spending by those guests. The revitalization of a substantial part of our fleet across brands is creating new revenue, onboard revenue opportunities. We were able to take some advantage of them in 2012 and would expect to continue to do so in 2013....As it relates to onboard revenue, there's a tremendous effort taking place across all brands to create onboard revenue upside, and I would say we're cautiously optimistic at this point in the year."
  • "Our capital expenditures this year are forecasted to be approximately $700 million. This includes the revitalization of six vessels, progress payments for new construction and investments in information technology."
  • "Our maintenance CapEx is generally in the neighborhood of around $200 million to $250 million a year. That could be slightly higher in a couple of these years due to some of the IT investments, but we've included that- the vast majority is obviously the new ships and the revitalizations."
  • "A lot of the improvement ... is ... coming out of the Celebrity brand, and the early indications are very good."
  • "I think the U.S. is for the most part, in line with the year ago. We do have some pockets, some products where people are actually beginning to book a little bit further out, which is obviously helpful. Northern Europe for the most part is very consistent with what we were seeing last year. But we have seen contraction in Southern Europe... countries are actually booking about a month closer to sailing than they had been a year ago."
  • "In aggregate, we're feeling is though we will have yield improvement in Europe this year."


WYN delivers an in-line quarter and stays steadfast in its buyback program


“We’re off to a great start this year, with an 18% increase in adjusted earnings per share. Our operating momentum is strong and our capital allocation philosophy is disciplined. This winning combination will
continue to enhance our growth and shareholder value, this year and in years to come.”


- Stephen P. Holmes, chairman and CEO




  • In the hotel group they had their best group openings ever, due to some large conversions.  Expect this to be a driving force going over.  They are doing particularly well with their Wyndham brand.  
  • Part of their success in the Lodging group is due to the Apollo initiative. More than 1/2 of the room nights booked are through their direct channel.
  • WAAM is changing their VOI strategy.  Recently signed a purchase and sale agreement for their WAAM 3.0 program - where they have a financial partner making investments for their future use. In the first instance their partner will purchase land in Las Vegas.  Expect to close on the deal 2Q13.  Proceeds to WYN will be $80MM. 
  • Think that the majority of their VOI sales will be in an asset light strategy
  • Their enhanced technology capability is helping them gain share in the exchange business
  • They consolidated their rental product on one website where customers can view all their inventory on one site
  • They are in the process of rolling out enhanced pricing tools in their UK Cottages businesses allowing them to yield manage more effectively. 
  • International RevPAR was flat and was negatively impacted by China - where economy brands are growing faster than other brands
  • Feel like their results in the exchange and rental business were good in the face of economic challenges in Europe
  • Rail acquisitions contributed $7MM of rental revenues but had no impact on EBITDA because of seasonality.  
  • VOI: Excluding the Shell acquisition, EBITDA would have been up $5MM. VPG was down due to difficult comparisons due to an upgrade program last year. Expect to come in at the low end of their guidance range in this segment. 
  • ABS front: completed a $300MM securitization (1.77% rate/ 90% exchange rate)
  • Added a $120MM debt associated with the Alex hotel.. even though legally it is their partner, they still had to consolidate. Their leverage was a little bit above their target range.
  • Expect around $5.45 of FCF in 2013.
  • Currency movements are causing a $10MM lowering of their guidance given last quarter 
  • Expect 87-90 cents of EPS in 2Q13. YoY comparisons will be challenging across all of their business. 



  • WAAM 3.0: similar to WAAM 2.0 in that they will provide financing to the end consumer. However, they are bringing in an partner to take down inventory.  Additional deals that they are working on now could be with the same partner or another partner. 
  • Owned hotel segment's ancillarily jumped a lot but most of that is pass-through, low margin revenue.
  • Is Rio Mar EBITDA positive? Yes - about $3MM
  • VOI- is that flatting out/ reaching maturity? VPG being down is not necessarily an alarming signal - it could be due to mix and the fact that they are pushing new sales vs. upgrades. 
  • Will margins be compressed if they focus more on new customers? If the mix of new customers increases that will lower margins but its just one of the levers....they just have a tough comparison from last year.
  • Their WAAM 3.0 partner is a financial partner. Inventory and land on their balance will decrease as they sell it to their partner who will complete it and deliver the finished inventory.  Their margins shouldn't be impacted negatively - if anything, this turns more into a fee for service business and more just in time. It will make the business less capital intensive.
  • Promotion lasted 3 Q's last year for upgrades. They will continue to seek out customers with higher than 700 FICO scores.
  • Tightened underwriting criteria wasn't really a factor in VOI.  They have made inroads in slowing defaults associated with the cease and desist activities.
  • WAAM 2.0: still be out there and they will continue to pursue opportunistic deals but may flip some 2.0 to 3.0 deals. The deal in NY is a 2.0 deal (Alex).
  • The WAAM 3.0 project is the LV project that they started a while ago. They will get $80MM upfront  $65MM for the building and $15MM for the land. Then as the inventory is completed and they need it they will take it down over time.The $80MM sale should close in 2Q13 as soon as some zoning issues are complete. The $80MM is above and beyond their core forecast of $750MM. The $80MM is about 1/3 of what they have on their balance sheet.
  • Exchange and rental outlook in Europe? Southern European product is moving really well.. indicated that Northerners are booking well. Northern to Northern travel has been slower.  They have seen a pattern of closer in bookings for this business. Think that their yield management system will help manage this pattern. The first quarter, you are booking Spring which isn't really a busy quarter. So it's too early to tell how the year will shake out since the summer is really the bulk of their business.
  • SS EBITDA would have been fairly flat to down slightly if you back out the Shell acquisition
  • Settled for less than they had reserved for and got reimbursed for some things as well... that was already in the forecast. What wasn't in there was the $10MM FX headwind.
  • Inventory spend in 1Q: $23MM
  • Any impact from the sequester? They don't see a big impact from it. 



  • In 1Q13, WYN repurchased 2.4 million shares of its common stock for $140 million. From April 1 through April 23, 2013, the Company repurchased an additional 620,000 shares for $39 million. The
    Company has $328 million remaining on its current share repurchase authorization.
  • The increase in adjusted net income reflects stronger operating results primarily in our Lodging and Vacation Ownership businesses. EPS also benefited from the Company’s share repurchase program, which decreased weighted average share count by 7% year-over-year
  • Reported net income included several items that are excluded from adjusted net income. The net effect of these items reduced first quarter 2013 net income by $71 million... primarily related to the early extinguishment of debt
  • The growth of free cash flow largely reflects favorable working capital utilization
  • Lodging
    • Results reflect RevPAR gains, a larger system size and revenues associated with the Wyndham Rio Mar in Puerto Rico, which became a Company-owned hotel in the 4Q12.
    • Domestic RevPAR increased 6%
    • Total systemwide RevPAR increased 4%, reflecting proportionally greater growth of lower RevPAR
      hotels in China
    • Company’s hotel system consisted of approximately 7,380 properties and over 631,800 rooms, a 4% room increase YoY
    • The development pipeline included 950 hotels and approximately 110,000 rooms, of which 55% were international and 59% were new construction.
  • Vacation Exchange and Rentals
    • In constant currency and excluding the impact of acquisitions, revenues increased 1%.
    • Exchange revenue per member increased 3%, while the average number of members remained flat
    • Excluding acquisitions, vacation rental revenues were flat, reflecting a 6% increase in the average net price per vacation rental offset by a 5% decrease in transaction volume.
  • Vacation Ownership
    • Excluding the acquisition of Shell Vacations Club, revenues increased by 2%.
    • 10% increase in tour flow offset by an 8% decrease in volume per guest.
    • The increase in EBITDA was The increase was primarily due to the favorable resolution of a lawsuit and the Shell acquisition
  • Balance Sheet items
    • Cash & equivalents: $217MM
    • Long term debt: $3.0BN
    • VOI receivables, net: $2.8BN
    • VOI inventory: $1.1BN
    • Securitized VOI debt: $2.0BN


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