Lately, there’s been plenty of buzz that companies like Uber and Amazon (AMZN) are lethal disruptors for FedEx Corporation (FDX) and United Parcel Service, Inc. (UPS). But to paraphrase Mark Twain, the looming death of the traditional postal carrier has been greatly exaggerated.
Interestingly enough, on the latest earnings call for FDX, Chairman Fred Smith had this to say:
“Concerns about industry disruption continue to be fueled by fantastical — and I chose this word carefully — articles and reports…In all likelihood, the primary deliverers of e-commerce shipments for the foreseeable future will be UPS, the U.S. Postal Service and FedEx.”
One reason is that FedEx’s footprint is massive. According to Smith:
“We’re not delivering from 50 fulfillment centers or 100 stores. We have the capability to pick up, transport and deliver an item from 95 percent of the human beings on the planet, much less every business in the world, within one to two business days, door to door, customs cleared.”
In other words, to borrow a phrase from Berkshire Hathaway’s (BRK.A, BRK.B) Warren Buffett, there is a powerful moat.
“[T]he reality is it will be a daunting task requiring tens of billions of dollars in capital and years to build sufficient scale and density to replicate existing networks like FedEx,” said President and co-CEO of FedEx Corporate Services Mike Glenn.
And yes, this should provide lots of comfort for investors in FedEx stock as well as UPS stock.
For example, FDX has a fleet of 402 aircraft and UPS’s is is 237. So to put things into perspective, AMZN is leasing 20 Boeing (BA) 767 freighters.
Now, even if AMZN’s business starts to fade, the impact should be manageable. In the case of FDX, no customer represents more than 3% of total revenues.
Besides, there should be something else that is encouraging to holders of FedEx stock and UPS stock: the breadth of services. Keep in mind that these companies have spent years building out businesses in critical areas like supply-chain management, complex deliveries and international trade services.
And both UPS and FDX are no slouches when it comes to technology. After all, these companies have been early adopters of systems for GPS, tracking, the cloud, Big Data and so on. So if Amazon or Uber want to take on UPS and FedEx, expect a fierce battle.
I reached out to uShip CMO Richard Metzler, who had this to say about the situation:
“UPS and FedEx can raise virtually unlimited capital. What’s more, Fred Smith and the FedEx team are also world-class players who will not go quietly into the night. If I were sitting in Atlanta or Memphis and AMZN and Uber started to hurt me, I would incite shippers to stay with me by bundling all of their services from a pricing and discount point of view. Uber has to remember that FedEx and UPS are not just local.”
Of course, even if AMZN and Uber may not be much of a threat — at least not any time soon — this does not mean you should necessarily buy FedEx stock or UPS stock. There certainly needs to be more analysis.
Last Word on UPS and FedEx Stock
But so far, the valuations are reasonable. Consider that FedEx stock trades at 13 times forward earnings and UPS stock has a multiple of 16.
Although, among these, FDX may be the better play. As seen with the latest quarterly report, the company appears to be running on all cylinders. In the fiscal third quarter, revenues increased by 8.5% to $12.7 billion and earnings came to healthy $2.51 per share, up from $2.03 in the same period a year ago.
Not a bad performance given the sluggish global growth. But then again, FDX is only one of the few companies that can provide critical and extensive logistics services to meet the robust demand for growing businesses like e-commerce.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
