It’s been quite gloomy lately — the economy appears to be weakening, and the stock market has taken a hit. Even Federal Reserve Chairman Ben Bernanke gave a dreary overview of things in his latest press conference.
Despite all this, there are places of optimism — just look at FedEx (NYSE:FDX). On its latest quarterly conference call, the tone was quite upbeat. In fact, management believes that the U.S. economy is going to get better. And given that FedEx is at the core of many businesses, it should have a good insight on the underlying trends of the economy.
FedEx’s shares have already had a good run, rising 20.6% for the past year.
But can the company keep things up? Let’s take a look at the pros and cons:
Pros
Big moat. For a new competitor to come into the market, the capital costs would be enormous. The fact is that FedEx has large global footprint — with customers in over 220 countries — and can handle just about any shipping need. As a result, the company has lots of pricing power. Consider that the increases are routinely 4% to 5% a year. Not many businesses can do this.
Strong operations management. FedEx is constantly improving its infrastructure. This includes investments in software and facilities so as to improve yield management, turnover and cost savings. These not only help to boost margins but also improve customer loyalty.
Megatrends. The global economy is undergoing many transformations. One is the growing trade in high-tech and high-value goods. Next, there has been an increase in outsourcing and collaboration. What’s more, the move to e-commerce still appears to be in the early stages.
In other words, these trends are key drivers for FedEx.
Cons
Shocks. FedEx is definitely sensitive to major changes to the global economy. Perhaps the most important is the change in fuel prices. This is a key input cost because of FedEx’s large fleet of planes and vehicles. True, the company has indexed fuel surcharges for its customers, but this is far from full-proof.
Labor. While FedEx has a good reputation with its employees, there are still risks. With its large labor forces, there are continual threats of unionization. Also, a big part of the labor force consists of contractors. If they wind up becoming employees, this could mean substantially higher costs.
Capital intensive. Every year, FedEx spends large amounts on airplanes, equipment, facilities and software. This can expose the company to significant risk if there is a recession. The result is often a big drop in profits. For example, during the recession of 2009, FedEx had to permanently remove aircraft from its fleet.
Liabilities. On its face, FedEx has a relatively small amount of debt, coming to about $1.7 billion. However, this is misleading. The company actually has enormous liabilities, which are in the form of leases. Such obligations are not necessarily easy to unwind.
(OK, that was 4 cons).
Verdict
FedEx believes the economy’s slowdown is fairly temporary and forecasts GDP of 2.5% this year and 3% next year. At the same time, FedEx is bullish on emerging markets like India and China.
Thus, there should be strong earnings momentum for the company — at least for the next couple years. And, the recent fall in fuel prices should be a nice boost.
Given the positive factors, the pros outweigh the cons for FedEx’s stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
