Friday, October 5, 2012

What to expect at FedEx's Investor Meeting Next Week

An interesting overview below from iStockAnalyst in regards to what to expect at next week's investor meeting.

Thoughts and more will be available here as well as Transport Intelligence Americas e-newsletter this Thursday, Oct 11.

FedEx Corp. is expected to conduct investor and lender meetings on Oct. 9 – 10. The event is an important catalyst for shares as investors await key details from company on the strategy for the domestic and international express business.
The event is expected to unveil additional details about long-awaited changes at U.S. domestic express, where investor expect cost savings of $500 million to $1 billion. Investors look for FedEx to unveil adjustments to its international express network such as aircraft delivery delays, tempered cap-ex plans, and a strategic vision to increase its use of third party capacity.
For at least six months, the company has been analyzing ways to improve efficiency at the express unit, which is the largest cargo airline engaged in the global delivery of packages and freight. The macro-economic slowdown and weakness in Europe have hurt revenue growth more-than-expected at Fedex Express, where revenue edged higher by 1 percent to $6.63 billion during the September quarter.
"We continue to see material cost opportunities as a result of expected actions which include: voluntary employee severance, aircraft retirement, head count reductions, and directing parcels to Ground," Deutsche Bank analyst Justin Yagerman said in a note to clients.
FedEx can reduce head count through attrition with its rank and file, and expect some additional reductions from retirement and voluntary buy outs. It has been in the process of "significant actions" to reduce costs to better match anticipated demand at Express. The cost savings should aid margin expansion at express despite a soft economic backdrop.
"While we expect express margins to contract year-to-year through FQ3, FDX should start to benefit from its express network alignment changes in FQ4 and experience meaningful cost savings in FY2014," Yagerman said.
As a result of the potential product optimization, the company could realize significant cost savings by permanently retiring aircraft, reducing line haul lifts, and adjusting its network staffing. CFO Alan Graf is leading a task force on reducing SG&A, which likely has meaningful cost opportunities.
"We note that every 100bps reduction in Express' portion of intercompany eliminations equates to $0.04 per share," the analyst noted.
In addition to potentially realizing meaningful SG&A savings, express is poised to benefit from operational adjustments that should also produce cost savings. These adjustments could involve the retirement of older, less fuel efficient aircraft.
Given the asset-light nature of these businesses as the company shifts more former express volumes to ground (domestically) and uses more third-party airlift capacity for international deferred and leverages FedEx services for ocean volumes, FedEx's returns will improve.
"While investors are likely acutely aware of the domestic express-to-ground opportunity, we do not believe investors are currently contemplating the potential opportunity to shift slower international volumes to third-party airlift capacity or its ability to leverage FedEx trade networks and shift lower-yielding traffic to ocean (from air)," Yagerman wrote.
In addition, FedEx could announce new tiered pricing on international package volumes. During the first quarter earnings conference call, it noted the headwind it experienced in its international express segment was due largely to trade-downs from international priority shipments to international economy.
The negative mix hurt express margins as FedEx continued to experience 30 percent plus decremental margins on the 2.2 percent year-over-year decline in international priority package volumes.
The company must better incentivize customers through pricing and service adjustments and increased third party airlift capacity use to differentiate its international priority and international economy service offerings.
"Based on our conversations with investors, we believe any adjustments to FDX's international economy pricing and  airlift decisions on the deferred service offering would be a surprise to Street expectations and represent an upside catalyst for the shares," Yagerman said.
On the flip side, if the company if the company fails to announce meaningful cost savings at the upcoming investors and lenders' meeting, then it could invite trouble.
"The Street has patiently waited for over six months as expectations have grown (we believe the current bogey is $500 million of annual cost savings from the express initiatives). The mere parking of capacity or accelerated aircraft retirements will not be enough to satisfy buy side expectations, in our opinion," the analyst noted.
FedEx should convince investors that it is serious about improving returns, enhancing free cash flow generation, and has a viable plan to increase the company's earnings power. The failure to demonstrate a long-term strategy that incorporates these items would likely impair the company's valuation multiple. FedEx is trading 12.8 times its full-year consensus earnings estimate versus peer United Parcel Service's  15.5 times.