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Will Brexit Dampen FedEx’s European Ambitions?

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Jun. 28 2016, Published 12:19 p.m. ET

Fall in FedEx’s stock

Brexit caused a 4.7% fall in FedEx’s (FDX) common stock. This was nearly double compared to a 2.6% fall in the price of United Parcel Service’s (UPS) share.

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Why FedEx fell heavily 

Historically, FedEx has traded at a lower premium compared to UPS. UPS has a sizeable presence in the international market, especially in Europe. FedEx is particularly strong in the domestic US market. In order to increase its footprints in Europe, the company acquired TNT Express NV in 2015 for 4.4 billion euros. FedEx completed the TNT acquisition in May 2016. TNT has a strong presence in the on-road European parcel delivery business.

After Brexit, the successful integration of TNT would be a big challenge for FedEx. With new processes coming into play in next few quarters, it will increase the delivery hours. This will lead to more administrative work while crossing borders. It will have a negative impact on the services. It might result in slower delivery speeds, higher costs, and fewer customers.

FedEx already declared in its 4Q16 results that it isn’t expecting TNT to be accretive to EPS (earnings per share) before 2018. However, low valuation and solid EPS growth should see FedEx bounce back in the coming quarters.

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Brexit’s impact on FedEx

The United Kingdom’s exclusion from the European Union’s Free Trade Agreement may shoot up the tariffs. In turn, this could pull down the competitiveness of firms in the United Kingdom. It could lead to low exports. The overall slow movement of goods due to the absence of the concept of one market could have a negative impact on the demand for logistics services in these locations. As a result, companies like FedEx wishing to expand their European footprint might come in the line of fire more.

ETF investment

This could offer some investors an opportunity to enter select stocks at desired levels. Transportation and logistics companies are part of the industrial sector. FedEx accounts for 2.3% of the Industrial Select Sector SPDR ETF (XLI). Major US airlines like Delta Air Lines (DAL) and railroads like Union Pacific (UNP) account for 11.6% and 7.7%, respectively, of its portfolio.

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