he share price of shipper and haulier FedEx [FDX]
closed above $164 last Friday, up 1.2% for the week after fourth-quarter results beat expectations and management pledged to double down in ecommerce delivery to shore up against Amazon [AMZN]
, whose share price has been galvanised by plans to build a self-sufficient shipping infrastructure.
Amazon’s share price has been edging upwards throughout June, where it started the month at $1,760.01 and has risen almost 10% to $1,934.31 as of Tuesday’s close. The stock, which jumped 1.6% overnight to reach $1,922.98 on 1 July, is now just 6% off the all-time high, $2,050.50, it reached on 4 September 2018.
FedEx’s stock had fallen 4% to $156 in the first three days of the week, as multiple analysts cautioned investors to go into Wednesday’s earnings release with low expectations. But shares subsequently rebounded after the company posted adjusted EPS of $5.01 for the three months to May, below last year’s $5.91 but 3% above analysts’ consensus forecast. The non-adjusted bottom line came out to a loss of $7.56 per share, down from last year’s positive $4.15.
The figures vindicated brokers like KeyBanc and Citi, who ahead of results saw share price – down some 28% from $230 a year ago – as having already priced in all the bad news from the trade war with China.
FedEx management, however, have revealed their concerns do not lie with China – which only accounts for 2% of the company’s revenues. Instead, there is a threat much closer to home: Amazon. Chairman and chief executive Fred Smith now intends to focus on ecommerce shipments as a growth driver, as it seeks to stand up to the increasingly self-reliant Seattle giant. FedEx is ramping up residential deliveries to seven days a week, and has partnered with retailer Dollar General [DG]
to use its stores for pick-up and drop-off services.
From customer to rival
They company had already thrown down the ecommerce gauntlet on 10 June, when it announced it was shutting Amazon out from its “Express” two-day air delivery programme. The move was applauded by analysts, who saw it as an opportunity for FedEx to move resources away from a demanding but low-margin customer account.
“FedEx will achieve higher margins and better returns on its investments in its Express network by redeploying capacity to customers other than Amazon,” wrote Moody’s Jonathan Root, while Allison Landry of Credit Suisse reckoned the divorce was “tantamount to drawing a line in the sand with respect to price and capacity allocation – a crucial investor consideration.”
“FedEx will achieve higher margins and better returns on its investments in its Express network by redeploying capacity to customers other than Amazon” - Moody’s Jonathan Root
Amazon share price boosted by airfield project
For its part, Amazon has been axing ventures in restaurants and cloud gaming in order to focus on making shipping one of its core verticals, akin to AWS and the online retail platform. It’s building a proprietary shipping network that could not only make it cheaper to ferry around merchandise from its website, but also compete with FedEx and United Parcel Services [UPS]
for third-party business.
After it revealed it was building an air hub near Cincinnati on 14 May, its share price shot up 3.7% in the two days following. And at the Paris Air Show last month, Amazon agreed to lease 15 more Boeing cargo jets for Amazon Air, it’s cargo airline.
|PE ratio (TTM)
Return on Equity (TTM)
Amazon share price vitals, Yahoo finance, 03 July 2019
For David Vernon of Bernstein, “[the] failure to reach commercial terms on [the FedEx-Amazon] contract is as much about what FedEx will accept economically as it is about what Amazon wants to do with its supply chain.” Meanwhile, Ravi Shanker of Morgan Stanley called it “a watershed moment for the parcel industry that signals [Amazon]’s emergence as a significant player.”
Tactics and strategy
FedEx investors must have been glad to hear CEO Smith debunk a Wall Street Journal article from earlier in the week, saying that the company was seeking to lure retailers by lowering shipping fees. Even so, the coming year is likely to bring some cash concerns. The company’s management said capital expenditure will rise 7% to $5.9bn, and “wants to spend upwards of $7bn”. In the Express segment, the loss of Amazon business won’t be offset until 2021, two fiscal years from now. And in terms of payouts, while the board expects free cash flow to increase over the coming year, stock buybacks will be “significantly lower”, and dividends will stay put at $0.65 per quarter.
But despite the short-term pain, investors may eventually end up thanking FedEx management. “Again, again and again, we’ve seen [management] do things that at the time may have been a little bit painful,” Donald Broughton, managing partner at Broughton Capital, told CNBC ahead of the results. “But they were willing to do tactically what was necessary to strategically take the hill – again, again and again.”
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