Analyzing Recent Changes At Fedex (FDX)

By Yaser Anwar, CSC of Equity Investment Ideas

• FedEx posted an annual base rate increase for 07 of 5.5% for Express, in line with the increase for 06, above the 4.6% increase in 05, 2.5% in 04, & 3.5% in 03 and 02, as it continues to lock increased fuel costs into its base, rate while lowering its fuel surcharge by another two percentage points.
• The resulting net rate increase is 3.5%. I believe this move allows the company to boost base rates rather than increase the more variable fuel surcharge, which still remains high at 16.5% in October.
• FedEx noted that 07 increases to its Ground rates will be announced later this year. In 05, both FedEx and UPS raised Ground rates 3.9%, near the high end of historical increases highlighting the industry’s commitment to a rational pricing environment. The Street expects FedEx to increase Ground rates approximately 3%, a target 11% package growth for 07.
• In addition, the company plans to add a new dimensional weight system for oversized Ground shipments, effectively increasing rates on lighter-weight, yet bulkier freight.
• On Nov. 7th FedEx agreeded to purchase a greater number of planes than originally planned with the A380. the street estimates this will increase FedEx’s capital spending by about $500M over what the 10 A380s would have cost.
• Given FedEx’s need for more international freighter capacity within three years, the delays by Airbus were too great. FedEx seemed unlikely to take two aircraft types, and as such, FedEx’s move should not be surprising. Moreover, the 777 also has some routing options that could make it a more flexible aircraft choice than the A380.
• Morgan Stanley believes that FDX’s switch in aircrafts is an appropriate move for FedEx and will allow it to remain on schedule to expand its global footprint. They view secular growth trends as a positive for FedEx’s efforts to expand international and ground packages, while investments in LTL freight have paid off very well.
• However, overspending on capex and/or a large, dilutive acquisition are both risks investors should be aware of.
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