Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Is FedEx making Money?

FedEx (NYSE: FDX) is having a record holiday season, as a lot of frustrated online shoppers have discovered, but is it making money?

The company formerly known as Federal Express was deluged with so much freight volume that a lot of shoppers were experiencing package delays. Things were so bad that FedEx suspended its money-back guarantee for U.S. packages on December 23, 2017. Bad weather at FedEx’s Memphis hub where wind-shear was causing substantial delays did not help.

FedEx is in the enviable position of having too much business, but is it making money? The answer on November 30, 2017, was somewhat, FedEx reported $775 million in net income on that day, which was slightly better than $691 million a year earlier.

FedEx is Making Some Money

Even though business is booming, it is obvious that FedEx is having struggles maintaining cash flow.

The delivery service reported a negative free cash flow of -$669 million on 30 November 2017. That was an increase over a negative cash flow of $140 million in November 2017.

The poor cash flow was offset by $2.768 million in cash and short-term investments and $50.281 million in total assets on November 30, 2017. That shows us FedEx has very little float.

The cash flow is very low because FedEx’s business is very capital intensive. All those planes and trucks cost a lot of money to lease and maintain. Fuel and labor costs are also high in FedEx’s business.

A major dilemma facing FedEx is that it may have to borrow to fund this year’s operations in hopes of being paid next year. Any benefit it gets from the good holiday season, is probably a few months away.

FedEx’s Unstable Business Model

This produces a very unstable business model that leaves FedEx highly vulnerable to sudden crises such as high fuel costs, cyber attacks, bad weather, and labor troubles.

FedEx actually admitted that a cyber attack on its Dutch subsidiary TNT Express, took 31¢ off its earnings per share earlier this year, US News and World Report revealed. That, of course, is an invitation for every cyber saboteur on Earth to go after FedEx.

An even greater dilemma at FedEx is the yearly holiday crisis. That is so many packages flow in during the holidays that FedEx’s distribution system simply crashes. This appears to have occurred again this holiday system.

Such crashes are one reason why both Walmart (NYSE: WMT) and Amazon (NASDAQ: AMZN) are trying to develop their own delivery solutions. The retail giants understand that delivery companies like FedEx are inherently unreliable.

Growth Makes Things Worse at FedEx

What is fascinating is that revenues are growing at FedEx, they increased by 9.26% during third quarter 2017. Those revenues grew to a record $62.34 billion on November 30, 2017.

What was scary was that the Free Cash Flow shrank as the revenues grew – falling to -$699 million. Federal Express has to spend more money to move more freight to generate more revenue, yet ends up with less cash at the end of the day.

All this shows us that FedEx stock was grossly overvalued at $249.60 a share on 26 December 2017. Both the market capitalization of $66.87 billion and the $79.65 billion enterprise value reported on Boxing Day 2017 seem too high. My take is that FedEx is headed for a nasty collapse because of the nature of its business.

Why FedEx could collapse very quickly

There are two events that would lead to a fast collapse of FedEx’s stock.

The first would be a truly disastrous holiday season; that is lots of news stories about angry parents with no presents to put under the tree on Christmas morning. An even greater catastrophe would be large numbers of people still waiting for their packages on January 10. What is truly frightening is that any self-respecting criminal genius out to sink FedEx’s stock value can engineer that scenario with a few well-placed cyberattacks.

A somewhat related but far greater crisis would be the launch of successful Amazon and Walmart delivery services. Both retail behemoths have been experimenting with a wide variety of delivery options.

Walmart has tapped Uber and Lyft, and its own employees as potential delivery drivers. Amazon has opened pop-up stores and experimented with delivery directly from its distribution centers.

How Amazon and Walmart are Trying to Kill FedEx

A far greater menace to FedEx is Amazon fulfillment centers right in major metropolitan areas such as Denver. Amazon was experimenting with two-hour delivery in Denver for the first time, The Denver Post reported. Such centers can be used as bases for Amazon-branded delivery vehicles or contract drivers like those from Lyft and Uber.

A related and less seen problem is Walmart and Amazon’s encouragement of in-store pickup of online orders. Walmart has experimented with pickup at convenience stores, lockers in store, and pickup counters in store. Amazon is considering similar amenities at Whole Foods Market and Kohl’s (NYSE: KSS) department stores.

This is truly problematic for FedEx because all it would take is for Amazon or Walmart move 5% or 10% of their delivery business in-house to hurt FedEx. If either Walmart or Amazon was to figure out how to do 25% or more of their own deliveries that would be the end of FedEx.

Some Better Logistics Investments than FedEx

My advice would be to stay away from FedEx stock folks because this company is heading for a bad fall at some point in the near future. Better investments in logistics would be truck builders such as PACCAR (NASDAQ: PCAR) and automakers like Ford (NYSE: F) and Fiat Chrysler (NYSE: FCAU).

Those companies supply the vehicles that move the packages, so they will make money no matter who operates them. Even if Amazon and Walmart manage to bring delivery in-house they will need a vehicle to haul the packages, and it will probably be a van or a truck – not a drone.