New and improved cost structure
FedEx (FDX) is in line to complete its profit improvement plan. It will help FedEx recognize its strengths. The plan will result in an improved cost structure. The company has successfully improved the operating margins from about 7.80% in 2013 to about 9% in 2015 without banking on revenue growth. It’s expected to hit the 10% mark in 2016 and beyond. This was expected by the company’s management. Its fleet restructuring and ground expansion initiatives are also on the right track. They will lead to lower costs and wider market reach in the future.
FedEx Ground is growing
FedEx Ground has been growing consistently for the last decade with strong annual revenue growth. The prime driver behind this has been the company’s heavy investments in the business and the rise in the e-commerce industry. The company has also implemented the dimensional weight pricing method to improve efficiencies and margins.
New software will likely boost FedEx Ground
FedEx Ground also consists of its SmartPost services. It gets help from the USPS (US Postal Service) for the last-mile delivery of residential packages. However, the company plans to launch a new software tool soon that will allow it to see if a FedEx Ground delivery is going to the same address as a SmartPost package. By doing so, the company can consolidate the two packages and have them delivered together by a FedEx Ground driver. This would allow the company to retain revenue from USPS on these deliveries without incurring any additional costs.
While Europe remains the key growth driver in the future with strong export volumes and the weaker euro, FedEx has also been investing in facilities and planes. It has acquired foreign companies to drive its growth in many other key markets like India, France, Hungary, the United Kingdom, Poland, Brazil, South Africa, and China. The company’s capex is expected to continue in this direction. These economies are expected to be the key consumption drivers in the future because they have the highest population growth.
Opting for biofuel
FedEx has declared that it will purchase three million gallons of biofuel a year for eight years from Colorado-based Red Rocks Biofuel starting in 2017. This is in line with the United Nations’ decision to start regulating emissions from commercial aircraft. This has led companies like FedEx and Southwest Airlines (LUV) to opt for biofuel. Biofuel is made from dead trees, bark, branches, and leaves. The price for the new fuel is expected to be competitive with traditional fuel.
To avoid the risk of investing in a single courier stock, investors can invest in ETFs like the iShares Transportation Average ETF (IYT) and the Industrial Select Sector SPDR ETF (XLI). FedEx forms the largest holding of 13.14% in IYT. Similar companies included in the ETF are United Parcel Service (UPS), Expeditors International (EXPD), and Con-way (CNW) with 7.60%, 4.19%, and 3.19% holdings, respectively.