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The Real Threat To FedEx Corporation Is Not Amazon.com

Any trade war -- not competition -- is likely to take a major toll on the company

By Tom Taulli, InvestorPlace Writer & IPO Playbook Editor


For the year so far, FedEx Corporation (NYSE:FDX) has stalled. And while FDX stock is flat, it’s better than rival United Parcel Service, Inc. (NYSE:UPS), which is off about 7%.

As for FDX, there are several notable factors that have weighed on the shares, most notably the overall volatility in the markets, the rise in oil prices and a lackluster holiday season.

But of course, investors have been getting nagging concerns about the potential threat of Amazon.com, Inc. (NASDAQ:AMZN). Let’s face it, the company has tremendous resources and a market cap of $732 billion. AMZN also needs to find ways to lower its shipping costs, as the ecommerce business continues to sport razor-thin margins.

Back in early February, the Wall Street Journal reported that AMZN is actually launching its own delivery service, called “Shipping with Amazon.” The plan is to start in Los Angeles and to focus initially on third-party sellers.

So might this be an existential threat for FedEx stock? To be honest, I think this is really an overreaction.

For the most part, FDX has tremendous barriers to entry. Note that the company operates a massive platform, which includes more than 660 aircraft, 170,000 vehicles and 5,000 facilities. Building all this has taken over 47 years.

So yes, it would be expensive and time-consuming for AMZN to replicate this.

It’s also important to consider the case of DHL, which spent substantial amounts to build a business in the U.S. domestic parcel market. Yet by 2008, the company abandoned its efforts. DHL simply could not achieve the economies of scale to make the business work.

And even if AMZN somehow is able to disrupt the market, the fact is that no customer for FDX accounts for more than 3% of revenues. In fact, about 85% of the operations of FDX comes from business-to-business shipments.

Trade War Pain

One of the biggest beneficiaries of global trade is FDX stock. The company is the world’s largest express transportation company, with operations that span more than 220 countries and territories. Think of FDX as an operating system for global trade.

But unfortunately, there are growing threats of protectionism. Already President Trump has instituted various tariffs and there have been retaliations from Europe and China.

So far, it’s tough to tell where all this may lead. But if there is a trade war, then FDX shares will get hit hard.

Here’s what the company’s CEO and Chairman, Fred Smith, noted on the most recent earnings call: “FedEx is concerned about the prospect of increased protectionist tariffs as history has shown repeatedly that protectionism is counterproductive to economic growth. The better approach is to encourage open markets and free exchange of products and services and to reduce barriers to trade.”

Bottom Line on FDX Stock

For FDX stock, there are still many strong drivers, such as the secular trends of ecommerce. As seen with Q3 report, the company continues to grow at a strong pace, with revenues up 18%.  And of course, FedEx will get a boost from tax reform as well.

But again, in the background, there will still likely be ongoing trade tensions. With the upcoming mid-term elections, Trump will likely try to fuel the rhetoric.

In fact, it probably does not matter if there is little substantive moves on trade. Just the overall uncertainty is likely to take a toll.  In other words, it’s probably best to avoid FDX stock for now.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2018/04/the-real-threat-to-fedex-corporation-fdx-is-not-amazon-com/.

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