Wednesday, 16 September 2015

Big levels in logistics firms: FedEx / UPS

I was looking back through my previous reviews of FedEx numbers here on and I noted that the last line of my December 2014 report titled 'FedEx - still waiting patiently for the 'right' share price level' pretty much summed it up well:

I guess I am waiting for a sub US$150 print

Well since then I have patiently waited and in the last few we are.  

Today's Q1 update however was not flawless unfortunately as my notes from the conference call attest: 
  • FedEx Co. updates FY16 guidance to $10.40-10.90 EPS.
  • FY16 guide lowered to $10.40-$10.90 (vs $10.82 est) on weaker LTL industry demand, higher self-insurance reserves & op costs at FDX Ground
  • "lower-than-anticipated volume at FedEx Freight."
  • Market share – competitive environment on ground
  • ‘essentially pleased…shift to e-commerce…but industrial forecasts…not a great signal for the commercial side of Ground.  Overall inline with our expectations’
  • On margins – ‘business is changing radically’.  Think best positioned on e-commerce.  Think lots of one-time events but also higher expenses driven by network expansion etc.
  • ‘pretty pleased with where we are and where we are heading’
  • Said issues in Europe be solved with TNT Europe
  • At/near peak capex as build out Freight division, cash flow improves markedly next year
With an EV of around US$46bn this would put the shares (at the lowered guidance) on a forward multiple of around x10 EV/ebit...which is no headline disaster.  Taking the comments at face value suggests to me that the 'miss' was half organic and half one-off - which is not great but no absolute disaster.  

I am not particularly enamoured by the TNT Europe deal as noted a few months ago (link here) but I was impressed by the value of the FedEx brand using the Brand Z data (link here)...although the proportion of its market cap covered back at that moment in time was lower than the proportion covered at FedEx's great peer UPS as you can see here

UPS is also at a big level, namely the law of round numbers level of US$100:

After the last set of UPS numbers in July I observed that: 

'First UPS the global logistical company which once again bounced off the c. US$95 level.  The last time I properly wrote the stock up (link here) I concluded that 'Global logistics stocks move around on hopes and fears for the global economy but there are some strong themes here.  In short, any material plunge below US$100 is an opportunity.  Worth keeping an eye on'. Following a higher range of the guidance range set of numbers this still feels correct'

That still feels the correct view.  I will be watching for a 'material plunge' (note the US$95 level above) below US$100 to get involved in the stock.  In the time there is a 3% dividend to play with. 

Bottom line both stocks are at interesting levels...which may turn into great levels.  Despite the patchy global trade backdrop an area to be keeping abreast of: an ever more complex, integrated, e-commerce world puts a premium on logistics systems.  

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