The future of delivery services like FedEx (NYSE: FDX) is either very bright; or extremely dismal, depending upon which way you look at them.
The bright future view is that constant growth in online retail ensures a steadily growing market and revenue streams. FedEx’s revenues seem to point to this; the company’s revenues grew by $870 million in the quarter that ended on May 31, 2016. For the record, Federal Express reported revenues of $49.5 billion in February that grew to $50.37 billion in May.
This seems to justify the popular view that the relentless growth of Amazon (NASDAQ: AMZN) and other ecommerce companies is driving FedEx forward. After all it has reported revenue growth for every quarter since August 2011, much like Amazon. The revenues grew by $2.32 billion during the year between May 2015 and 2016 a low.
The future looks even brighter with services like Walmart’s (NYSE: WMT) Shipping Pass; which gives customers free FedEx two-day shipping in exchange for a $49.99 a year fee, and Amazon Prime growing in popularity. Amazon’s recent moves into the private label business and the escalating online retail war between the Everything Store and Walmart look good for Federal Express.
FedEx’s Cloudy Future
Now for the pessimistic contrarian view, which states that FedEx’s growth prospects are limited and its business will begin to shrink because of growing competition. Both Amazon and Walmart are looking for alternatives to FedEx; and its closest competitor, UPS (NYSE: UPS).
Each retail giant has put its own branded delivery trucks on the roads in some markets. Amazon has experimented with drones; and an Uber style delivery app. Walmart is currently testing Uber’s delivery service in Phoenix; Lyft’s delivery service in Denver, and another delivery solution called Deliv in Miami.
Amazon is also buying or leasing its own planes and semitrailers to get more control over its logistics. Walmart has a massive logistics system that includes a vast fleet of trucks and thousands of stores.
Another potentially disruptive solution that Walmart has tested is lockers in stores, from which customers pick up orders. The retail giant has tested those in both the United Kingdom and Ontario.
All this points to a murky future, in which retailers will strive to get free of the FedEx/UPS duopoly by any means possible. The retailers are attempting this to reduce costs and give them more control over the supply chain.
FeEx’s weak Profits
The situation is made worse by FedEx’s weak profits – the company reported a profit margin of -.54% on May 31, 2016. That indicates FedEx is struggling to make its current business pay without Uber competition.
Although the company has been making more income in recent months, the net income increased from $996 million in February to $1.82 billion in May. That indicates Federal Express is recovering from last year’s income drop. The net income fell from $2.901 billion in February 2015 to $996 million in February 2016.
Despite that FedEx has some float; it reported a free cash flow of $656 million, cash and short-term investments of $2.841 billion, $3.611 billion in cash from financing, and $5.708 billion in cash from operations on May 31. The company is making a lot of money despite its struggles with income and profits.
I think Federal Express is a lousy investment, despite its .75% dividend and 6.59% return on equity. FedEx is a bad investment because it was grossly overpriced at $159.22 a share on July 7, 2016. There’s nothing in its financial numbers to justify that price.
Particularly since the larger UPS was trading at $110.46 a share on July 1, 2016. UPS reported TTM revenues of $58.8 billion on March 31, 2016.
Uber’s Threat to UPS and FedEx
My prediction is that both of the big delivery services are on shaky ground, because two of their major customers; Walmart and Amazon want to severe that relationship. The situation is made worse by Uber; a company that has demonstrated it can quickly build a widespread transportation network with limited resources.
That means UPS and Federal Express could soon experience the kind of massive disruption we’ve seen in the rental car taxicab businesses. Back in April the accounting software company Certify reported that more business travelers listed ride-hailing apps; than car rentals on their expense reports for the first time, in fourth quarter 2015.
UPS and FedEx would probably survive such competition; but they might see serious drops in revenues. That means these stocks will probably drop in years to come, particularly if Uber or Lyft is able to ink a major delivery deal with Amazon or Walmart.
Investors should stay away from FedEx because it’s overpriced and in a business with a questionable future. Instead of FedEx you should buy into an automaker like Ford (NYSE: F) if you want a transportation solution. Ford is cheap; and Uber might soon provide a huge market for the automaker’s popular Transit vans, if it manages to steal FedEx’s Walmart business.
Another interesting option is Walmart itself which is also very cheap. Walmart was trading at $73.09 a share on July 7, making it a bargain compared to FedEx. Federal Express is one that stock may no longer delivery real soon because of Uber.