Capital expenditure in the logistics industry
Logistics and transportation companies have to make a huge investment in capital assets. Even FedEx (FDX) is no exception. However, what matters is how productively assets are used to generate higher returns. Investors should note that in the railroad industry (UNP), rail carriers have to spend on tracks and bear the maintenance and repairs expenses. But trucks (JBHT) run on highways that are built by the federal and state governments. Thus, capital expenditure is much higher for railroads than trucking.
FedEx’s capital investments
Companies like FDX and United Parcel Service (UPS), which mainly operate in the less-than-truckload sector, need to infuse billions of dollars to create a hub-and-spoke model. Plus, these companies make substantial investments in aircraft, package handling facilities, technology, and specialized vehicles to support the business and logistics network.
FedEx grew significantly after 1977 when the Airline Deregulation Act was passed. This act reduced restrictions on cargo aircraft. Cashing in on the opportunity, FDX added bigger aircraft like Boeing 727s to its fleet.
In the last ten years, FDX has spent an average of ~8% of its revenue on procuring capital assets. This was primarily due to the older fleet of aircraft. When compared with United Parcel Service (UPS), FedEx spent double what UPS spent during those years. FDX also needs to replenish its fleet of aircraft, which will involve a huge cash outlay. It has plans to retire less-efficient aircraft in order to modernize its cargo fleet.
Investors who want diversified sector exposure can invest in the WisdomTree Earnings 500 Fund ETF (EPS). FedEx also forms part of the portfolio holdings of EPS.
The company expects to spend $4.6 billion in 2016 on capital expenditure. The amount will go towards continued expansion of the FedEx Ground network and additional aircraft at FedEx Express. Investors should note that FDX spent 23% more on capital expenditure in 2015 compared with the last year. 45% of FedEx’s capital expenditure in 2016 is for growth initiatives.
On March 16, FDX announced its 3Q16 results, which we’ll discuss in the next article.