Transport’s fell 9% last week, with a decline in the S&P 500 of 6% with a big part of the Transport drop due to Fed-Ex’s report on Thursday, which took the stock down about 8% on the day. After reviewing the numbers, while Express volumes were soft, the star of the quarter was yields, which rose 10% in Express, 9% in Ground and 11% in Freight. You’d think it tough to believe that a Tranport like FedEx would have the kind of pricing power it does in this environment, but FedEx with the earnings release also announced a 2012 rate increase for Express of 3.9% for US Domestic, US Export and US Import Services starting Jan 2, 2012. FDX lowered guidance by a dime or 10 cents on the orginal 2012 eps of $6.35 - $6.85, reducing the FDX forecast for full-year 2012, to a range of $6.25 - $6.75. Id like to see FDX close the quarter above $70 come Friday afternoon Sept 30th, as a technical level, which was the June ’11 low, but the fact is the current price discounts a lot of the perceived economic slowdown since FDX is trading at 0.5(x) price to sales and 5(x) enterprise value to 4-quarter trailing cash-from-ops. In addition FDX announced with earnings an increase in the stock buyback to 5.7 million shares under the current authorization or between 1.5% - 2% of shares currently outstanding. How can FDX generate this kind of pricing power now ? Well, their competition with UPS has always been thought to be pretty rational, since neither transport does anything to cut-throat to impair profits, and with DHL out of the US market, it took an irrational competitor from the lanscape. Both FedEx and UPS currently enjoy a subdued competitive environment. although FDX Ground continues to gain share on Big Brown. The bottom line is i think FDX is fine if Asia / China doesnt slow dramatically, and if the US economy can stay out of the recession. FDX proved with this quarter’s results that Express’s network variable costs can be adjusted fairly quickly to changes in volume, as US dometic volume declined 3%, IP volume declined 4% and IP weight rose 2%. ( i looked at fiscal q3 ’09 volumes for US Domestic and IP whichw as the heart of the 2008 - 2009 recession and US Domestic fell 3% but IP fell 13% and yields fell double-digits. )
The key negative to FDX is the operating leverage. The fact is if you are uncertain about the economy here buy UPS, since it has far less operating leverage in its operating model. Lower oil prices definitely helps as margins are fattened with the fuel surcharge as long as volume doenst fall off the table.
Long FDX and UPS (smaller position, but may add to UPS after q4 begins)
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