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).