Dueling Fools
FDX-cess?
March 31, 1999

FDX Bull's Rebuttal
by Paul Larson ([email protected])

Rick points out on his initial argument that FDX is expected to grow earnings by a mere 5% or so this year. I can't argue the number, but there are some mitigating circumstances to consider. First, the company had to deal with an eminent pilot strike and work slowdown last year that took a bite out of profits. Second, the Asian economic situation severely hurt results from operations across the Pacific. The fact that the company has been able to increase profits in spite of these adversities speaks volumes about the strength of the underlying fundamentals with FDX.

Rick then threw out the idea that e-commerce sales simply represent a shift in the distribution network. I think it should be obvious that the model of shipping truckloads of inventory to distributors and then to stores is vastly different from the "direct" model of something going straight from the sellers to the buyers at home. FDX's parcel delivery system may lose slightly in this shift from centralized to personalized shipping, but clearly those that deliver straight to the doorstep are poised to benefit most from the electronic commerce explosion.

Then there's the issue of the Postal Service. I find it hard to believe that Rick can call the bureaucratic agency legitimate competition. When it comes to speed and quality assurance, FedEx is without equal. The point about FedEx's rates being tied to postal rates is interesting, but it is important to note that FDX can and does charge more than the Postal Service. People are willing to pay the extra fee in order to get the speed and reliability the company offers. These are added values to the service that will take a minor miracle for the Postal Service to ever offer.

One of the points that I think rings the most hollow with Rick's argument is the thought that FDX's good fortunes over the past year are solely due to low fuel costs. Rick asks what higher energy prices will do to profits, and the answer is "not much." In the last quarter, fuel costs represented slightly more than 4% of the company's total expenses. So even if the price of oil were to increase by a dramatic 50%, FDX would still be safely in the black.

Finally, Rick states that the move to a paperless society will dampen the needs for speedy delivery. An electron traveling along copper is always going to be speedier than even the guys and gals down in Memphis, but I doubt that the need for corporeal forms of documents is going to disappear any time soon. If Rick's idea is right, why has FDX been able to increase its top line in the face of the online communications explosion? In fact, a case can be made that the Internet lets the distance between employees and employers become somewhat irrelevant. Online communications and package delivery go hand-in-hand as they allow folks to work remotely. (Since we both work several hundred miles from Fool HQ, we should know!) The Internet shrinks the distance for idea exchange between people, and Federal Express helps shrink the distance for those things you can touch and feel.

Stepping down from playing a futurist, I stand unmoved in my conviction that FDX is an outstanding company with a bright future. With little credible competition and something close to a monopoly in the overnight shipping business, I see a company ripe to benefit from the online revolution. And with an extremely reasonable valuation, I find it difficult to see where the FDX bears are coming from.

Next: The Bear Responds