FLASHBACK | Best Idea Long → $FDX

FedEx (FDX) is once again making necessary changes to improve its network efficiency. Once again, investors despise it.

As noted in our November 2012 deck on FedEx, the company tends to do the right thing for investors after having exhausted all the other options. FedEx is finally integrating parts of ground and express delivery networks, a challenge when the independent contractor model was less secure.  FedEx will finally incur the significant expenses associated with integrating TNT into the air network, realizing the vision that unlay the deal in the first place. 

Ground’s move to 7-day delivery may be disruptive initially, but speed improvements and competitive differentiation should prove a cost and share benefit.  FedEx has unrivaled assets –~30% share in the US ground market, the largest LTL network, a strong position in the international airfreight oligopoly, and an integral logistics unit. Amazon would do better to buy FedEx than try to recreate its B2B heavy networks.  

With transports, investors theoretically want to enter ahead of the trough in industrial production in the early/mid/late cycle framework - we don’t really like that approach. 

We tend to think that each industry has its own character, but in this case key elements are lining up for a great entry point during 2Q20 – the stock is already discounting a complete mess in terms of its valuation.  Relative to the market, shares of FDX have never been cheaper, just as it capitulates to investor demands for integrated networks and structural delivery improvements…

If we are right on this take, shares of FDX could well be a double from current levels, even if there is a rough ride in the next few months.

We continue to see FedEx (FDX) as offering a rough relative double over the next few years as restructuring and integration boosts returns.  Trade routes are likely to evolve post-election in either outcome, while passenger air traffic – and belly space – remaining constrained.  UPS, FDX, and Deutsche Post are likely to post decent calendar 2Q20 results on elevated air cargo rates - a rarity within the sector – with FedEx reporting at the end of June. 

Shares of FDX have rarely been cheaper or better positioned within the market. Insofar as the current crisis echoes that of 9/11, with already declining industrial activity greatly worsened by an external shock that impacted passenger air traffic in an equity market with a narrow set of overvalued tech names, FedEx may again be positioned for a prolonged period of substantial outperformance.