Helping Santa out

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Coming up to the end of the year is usually a busy time for most, with plenty of work to do but also preparation for (hopefully) a holiday with family or friends. Not everyone is winding down though; so spare a thought for how busy Santa’s crack team of elves are at this time of year! Billions of presents that have been made over the course of the year need to be tagged with the right addresses ready to be delivered by Santa and of course his trusty team of reindeer headed by Rudolph.


The North Pole is not the only busy spot at this time of year with friends and family sending presents through more traditional channels. Global Opportunities constituent FedEx (NYSE: FDX, initial buy $75.00) is pivotal in this regard and also a beneficiary of online shoppers treating themselves to a Christmas present or two.

Strong e-commerce sales helped the company report a better-than-expected quarterly set of numbers this week, with non-GAAP diluted earnings per share surging 19% to $2.58, handily beating the Street estimate of $2.51. Investors have marked the shares up in trading following the announcement.

Of the quarter, CFO Alan Graf said, “Our improved financial results are being driven by better revenue quality, e-commerce growth and the successful execution of our profit improvement initiatives.”

Global trade may be on the slow side, but a record number of holiday shipments are being fuelled by the rise of e-commerce. This, along with an acquisition (GENCO) and higher base rates propelled a 32% increase in revenue to $4.05 billion at FedEx’s Ground segment. In October the company predicted that it would ship a record 317 million packages between Black Friday and Christmas Eve, representing a 12% rise compared to the year earlier period.

The growth in Ground segment revenue countered single-digit declines in revenue at the Express and Freight segments – largely due to lower fuel surcharges – and helped the company post $12.5 billion in revenue, up from $11.9 billion in the year ago quarter. Adjusted operating income of $1.2 billion expanded 17.6% year on year.

FedEx’s pending acquisition of TNT Express looks to have been well timed and represent good value. As FedEx CEO Fred Smith said on CNBC’s “Squawk on the Street,” the “Planets lined up perfectly for this move.” These ‘planets’ were the strong US dollar, cheap debt due to low interest rates and low oil prices.

The deal makes a lot of strategic sense, combining companies with different strengths.

FedEx has a limited footprint in the intra-EU delivery market, with a market share (~5%) that places it in a distant number 4 spot. By joining with TNT Express – the number three player with circa 12% – FedEx will catapult itself to be a contender with UPS (~16%) for the number two slot and be not too far behind DHL’s top dog position in Europe with around 19 percent courier share.

And besides the immediate building of scale in European delivery, we believe FedEx’s global scale and strength in deliveries to and from Europe may help to win additional market share for the combined TNT/FedEx business in Europe, with more logistics hubs and drop-off locations enhancing the ability to improve service offerings in the form of later pickups, faster delivery and the like.

We note too that TNT Express has a solid business in delivering to and from the Asia Pacific, Middle East and other emerging markets, so there should be nice efficiency gains possible for the merged entity in terms of package density. The TNT Express deal should be concluded in the first half of 2016.

We consider the stock good value at these levels, with a price to earnings multiple of 14.1 times (year ending March 2016) representing too large a discount to circa 18.2 times for competitor UPS in our view. With growth to be boosted by the TNT Express deal; the price to earnings growth (PEG) ratio for FedEx is an attractive 0.8 times.

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