If there is one company poised to cash in on the new shopping order emerging from the retail apocalypse it is FedEx (NYSE: FDX). The organization formerly known as Federal Express is well-positioned to capitalize on the evolution of American retail.
One retail development that looks promising for FedEx is Nordstrom’s (NYSE: JWN) new concept store, Nordstrom Local. Nordstrom Local has no racks, and very little stock instead it simply acts as a customer service location for merchandise purchased online.
This is an opportunity for FedEx because Nordstrom has no door to door delivery service of its own. FedEx; or its competitors, will be tapped to deliver the merchandise. If Nordstrom Local is successful other retailers will follow suit.
Walmart’s Explosive Growth is Good News for Federal Express
Even better news for FedEx is the explosive growth of Walmart’s (NYSE: WMT) online sales.
The gross value of merchandise sold through Walmart’s ecommerce ecosystem grew by 67% between first and second quarter 2017 alone, eMarketer Retail reported. Forbes contributor Erin Moloney estimated that Walmart’s online sales in August 2017 were 60% greater than in August 2016.
FedEx benefits because it is still Walmart’s delivery service of choice for online orders. Walmart’s push to attract new rural, middle-class and upper-class customers benefits FedEx because those customers rarely go near Walmart stores. An example of this push was the purchase of the men’s clothing site Bonobos which sells mostly online to males that hate to shop.
Also benefiting FedEx is the growth of online shopping clubs such as Amazon Prime and Walmart’s Jet.com. Around two thirds of frequent online shoppers used Amazon Prime which offers free-two day shipping provided via FedEx, Retail Dive reported. Also popular are free shipping deals like that at Walmart.com where customers get free two-day shipping (usually from FedEx) if they spend more than $35 (€30.12) an order in the United States.
Is FedEx Making Money?
Current events including the mass die off of brick and mortar stores and explosive online sales growth look good for FedEx but is it making money? The answer is sort of, FedEx reported a net income of $2.878 billion (€2.48 billion) and a negative free cash flow of -$454 million (€390.72 million) on August 31, 2017.
FedEx’s income grew dramatically over the past year; probably due to lower fuel costs, but has started to fall again. FedEx reported a net income of $1.843 billion (€1.59 billion) in August 2016 that rose to $2.997 billion (€2.58 billion) in May 2017, and fell to $2.878 billion (€2.48 billion) in August 2017. This reflects both growing revenues and fluctuating expenses.
Revenues are growing substantially at FedEx. The delivery service reported $52.75 billion (€45.40 billion) in revenues in August 2016 that rose to $60.69 billion (€52.23 billion) in August 2017. It looks as if Amazon (NASDAQ: AMZN) and Walmart’s online growth is paying off for FedEx.
This growth certainly gives FedEx a lot of value, on August 31, 2017; it reported $3.503 billion (€3.01 billion) in cash and short-term investments, $49.35 billion (€46.23 billion) worth of assets, $4.549 billion (€3.91 billion) in cash from operations, and $753 million (€648.05 million) in cash from financing. FedEx has a growing business that generates a lot of float.
Is FedEx a Value Investment?
This certainly gives FedEx some of the characteristics of a value investment.
Although I think it was definitely overpriced at the $225.14 (€193.76) share price reported on 1 November 2017. Mr. Market disagreed with my conclusion giving FedEx a market cap of $60.37 billion (€51.96 billion) and an enterprise value of $72.20 billion (€62.14 billion) on the same day.
Even at that price, FedEx is not a bad deal because investors did make money. They received a dividend of 50¢ (€0.43) on September 8, 2017, up from 40¢ (€0.34) in March. That’s a 10¢ (€0.09) increase in three months which is good.
The same investors also received an 18.80% return on equity on August 31, 2017, so you will not lose money with FedEx. It is a pretty good investment for the Brave New World of Retail, even though I think there are cheaper alternatives such as Walmart and UPS (NYSE: UPS) out there. United Parcel Service shares were trading at $117.47 (€101.40) and Walmart was trading at $88.16 (€75.87) on 1 November.
The Threats to FedEx
There are some serious threats and potential threats to FedEx that all investors need to be aware. Some of the most visible threats include:
· Retailers launching their own delivery services. Walmart, Amazon, Kroger, and a number of other companies have experimented with this. Walmart has even tried to recruit its associates as delivery drivers. My guess is that the sheer cost of such efforts, companies will have to hire drives, buy or lease vans, and add staff to stores or warehouses limits this option — for now.
· Delivery apps such as Uber, Lyft, and Deliv. This threat is big because it allows retailers to offer same-day delivery from stores at a very low cost with no additional infrastructure. There are serious questions about this alternative including scalability, security, and reliability.
· Store pickup and returns of online merchandise. This is the biggest threat, because it is the cheapest and easiest option. It is also the option that retailers such as Kroger (NYSE: KR) and Walmart are investing heaviest in. Major threats to FedEx including new stores designed for pickup; like Walmart’s convenience stores and Nordstrom Local, and companies like Kroger or Safeway partnering with Amazon for pickup. Kohl’s (NYSE: KSS) and Amazon are testing such a service.
· Unionization. Those who think FedEx’s business model of using contract delivery drivers is union-proof might be sadly mistaken. Uber drivers have already unionized in New York, and unions like the Teamsters are eyeing contract-delivery drivers as the next frontier. Disgruntled Uber drivers in particular look like ideal union material.
· Changing political, legal, and regulatory environments. A major long-term threat to FedEx and similar companies would be leftwing Democratic majorities in Congress and state legislatures. This is a strong possibility given the lousy economy and the ongoing implosion of the Republican Party. A major threat to many businesses will Democrats trying to force unionization on contract workers and businesses. One reason why they would do this is that union dues are a major source of funding for the Democratic Party.
· Drones. My view is that current drone technology is not a serious a threat to FedEx. It’ll require serious technological advances and changes in popular attitude to make drones a viable delivery method in the United States. Instead, drones will be used for specialized deliveries such as disaster relief and military applications.
The present retail environment gives FedEx a bright future, but there are some serious threats lurking on the horizon.
This article originally appeared at Market Mad House last month.