Analyst note, Keith Schoonmaker, CFA, 16/12/2014
FedEx announced the acquisition of Pittsburgh-based third-party logistics firm GENCO, which produces $1.6 billion of annual revenue (FedEx generated $46 billion in the trailing 12 months). GENCO's 11,000 employees in 130 operations process more than 600 million returned items annually; the firm serves a variety of industries by providing warehousing, contract packaging, test/repair/refurbishment, product liquidation, recycling, and other transportation management services. Adding this 3PL to its portfolio substantially boosts FedEx's asset-light supply chain operations, a segment the company has been building up for the past five years or so by expanding its Trade Networks international freight forwarding business from a couple of dozen offices to more than 130 offices around the world. Trade Networks' revenue is not reported separately from other Express operations. The deal is scheduled to close in 2015; terms were undisclosed. Absent information, we assume the firm paid fairly and we maintain our fair value estimate. Still, we think extending its reach into forwarding and supply chain functions can serve to funnel additional parcels into FedEx's air, ground, and freight networks.
FedEx will report earnings Wednesday.
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Bull og Bear scenarier for FedEx Corp
Bulls say
- FedEx's huge air fleet, 50,000 drop boxes, and global operations knit together a massive presence unlikely to be replicated except by its few current competitors.
- In addition to ground growth, resumption of higher margins in the LTL freight and international express businesses should boost revenue growth and consolidated operating margins, assuming some boost in international volume over current levels.
- During its four-decade history, FedEx has weathered multiple economic cycles and oil supply crises. While short-term results may suffer, the firm's powerful network is here to stay.
Bears say
- Although critical to growth, a high level of international exposure makes the firm vulnerable to downturns in global trade and political interference.
- Operating one of the world's largest airlines is a highly capital-intensive endeavor, and air freighter replenishment will demand substantial capital expenditures during the next several years.
- While fuel surcharges buffer much of the impact of rapid jet fuel and diesel price shocks, FedEx remains highly exposed to the price of crude oil.
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