Dueling Fools
FDX-cess?
March 31, 1999

FDX Bear's Den
by Rick Munarriz ([email protected])

I'm not sure what has more momentum right now, a Federal Express jet barreling down a landing strip or the shares of FDX itself. Ultimately they will both come to grinding halts. However, only one will find itself near a refueling station with clearance to hit the skies again.

It's not FDX.

I'm sure the hoopla over how e-commerce will benefit Federal Express has made its way to you. My question is, have you run the numbers? They're there, yet nobody seems to make the connection. Online sales have tripled annually. FDX profits? They are looking to climb a scant 5% this year. Insert yawn here.

FDX is simply too large a company for e-tail parcel deliveries to have any kind of major impact. Besides, that impact cuts both ways. Think about it. Online orders are being filled from central warehouses. If those were conventional retail sales, how would the products have gotten from the warehouse to the local brick and mortar shop? FDX, through its many different subsidiaries, is just shuffling around the fulfillment duties. It's not exactly a zero sum game, but the net growth, as the numbers bear out, is marginal.

Get it? Investors are buying this mirage of FDX as the one company doing all the legwork in e-commerce fulfillment, but that's just not reality. RPS, the company's parcel delivery division, is no UPS. Then we have the U.S. Postal Service, which, after a span of time in which it lost money over 17 of the past 23 years, has rattled off 5 consecutive years of profitability.

As amusing as it is misplaced to poke fun at postal workers, let's not let that levity dismiss the U.S. Postal Service as a serious competitor. The Postal Service has a government-sponsored monopoly in place. It does not pay taxes. It is the only operator allowed to use your home mailbox. By law, any other company must charge $3 more for delivery. All this gives the post office a huge head start.

Plus, now that the post office has hit a comfortable groove in terms of profitability, it is becoming a much more dangerous threat to the private sector. I can't remember ever seeing as many Postal Service commercials as I do today. It is also branching out into areas like parcel packaging.

At the very least, it is important to note that any kind of pricing flexibility for FDX is tied to postal rates. Over the last four years, the cost of a first class stamp has risen by a single penny. That is an annualized rate hike of less than 1% over that span of time. Buy a company that doesn't even have the pricing luxury to keep up with inflation? I don't think so.

Over the last few quarters, FDX has beat out analyst estimates -- but why? Thanks to rock-bottom fuel prices -- and between jets and trucks you can imagine how energy-intensive FDX is -- the company has been able to boost net performance. Well, over the past few weeks we have seen crude oil production curbs and prices have begun to shoot back up. It was only a matter of time. So, if dirt-cheap crude had the company beating projections, what do you think higher energy prices will do to the FDX income statements from now on?

The irony of FDX is that while investor perception remains that the push towards new technology like Internet commerce will help FDX, it may also eventually hurt it. In the business world, Federal Express is associated with rapid document delivery. But we continue to make strides toward becoming a paperless society. We now have more immediate alternatives than over-night delivery. From fax machines to e-mail to teleconferencing, the groundswell for cheaper and faster dissemination of information, while admittedly not as formal, is growing. And with that, FDX's prospects are shrinking.

Next: The Bull Responds