There’s a myth that the rise of Amazon.com (NASDAQ:AMZN) represents an existential threat to delivery companies like FedEx (NYSE:FDX).
It’s a myth FedEx sought to dispel August 7 by announcing it will not renew its ground delivery contract with Amazon, having already ended its air freight relationship.
The result was to continue the volatility that has dogged FDX stock since last December, when the shares fell 30% during that month’s tech wreck. While shares have since traded as high as $195, they’re now flat on the year and open this morning just above $164.
At that price FedEx has a market cap of $43.8 billion against 2018 revenue of $69 billion. If it can meet analyst estimates September 20, earnings of $3.20 per share on revenue of $17.36 billion, today’s price will look cheap.
Behind the Fall
Behind the fall in FedEx is an Amazon-like strategy of investing cash flow to fund real growth.
The company’s 2018 operating cash flow of $5.6 billion nearly all went out the door in the form of capital spending, which totaled $5.5 billion. FedEx did boost its debt, which totaled $16.1 billion in May, but only 10%.
FedEx has been spending that money doing just what Amazon does, only for all of Amazon’s competitors. It’s working on drones. It’s doing seven-day delivery. It has partnerships with Walmart (NYSE:WMT) and Walgreens (NYSE:WBA) on next-day shipping. It’s also using stores like Target (NYSE:TGT) as local shipping centers. It’s putting another $450 million into its Memphis hub.
The FedEx plan for making a profit on these changes is to use ground services for Sunday deliveries, because those costs are lower.
Even before the announcement, FedEx and Amazon had been going through a conscious uncoupling, with Amazon representing just 1.3% of FedEx revenues, despite perceptions otherwise
If Amazon and investment aren’t the risks in FedEx stock, what is?
Which Brings Us to… The Trade War
The prospect of slowing global trade is the real threat to FedEx’s future.
Deliveries at FedEx’s Memphis hub were down 6% in June from the same period a year earlier. It’s consistent with a general slowdown in global trade.
Analysts are calling this a “transportation recession.”
Right now, this is mainly hurting FedEx’s traditional rivals. Rail traffic was down 7.2% year-over-year in June.
Seven long-haul trucking firms have closed their doors so far in 2019. Orders for the big trucks are down 81%.
A transportation recession isn’t the same thing as a real recession. There was a transportation recession in the middle of this decade, but the general economy kept growing. It’s just that this one is steeper and deeper than the last one.
Manufacturing is also going into recession. This is why some analysts are now starting to predict a general recession , perhaps as early as next year.
Bottom Line for FedEx Stock
FedEx has been so busy chasing Amazon’s growth that it may be outstripping the ability of its own customers to pay it back for the investment.
The good news for FedEx stock investors is this risk may already be in the shares. FDX is down more than 30% in the last year, more than the transport average. But if it meets its current earnings guidance it would have a forward price to earnings multiple of 11x.
FedEx’s low valuation is starting to attract hedge fund vultures like Pershing Square, which has reportedly been a big buyer of the stock.
If the trade war abates, FedEx will be a big winner. If it continues, FDX stock could be a big loser. That’s what you should consider with FedEx stock, not its war with Amazon.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
