Forbes Article:
FedEx is one good package deliverer. But don't kid yourself that it's an Internet play. Absolutely, positively overblown
By Kelly Barron
SHARES OF FDX CORP., the $16 billion (1998 revenues) parent of carrier Federal Express, have soared 42%, to $93, in the past three months. Is Memphis-based FedEx suddenly shipping 42% more fresh lobsters, legal documents and important packages?
Hardly. FedEx's domestic express shipments rose 5% in the second quarter ended Nov. 30, 1998 from a year ago, according to Merrill Lynch analyst Jeffrey Kauffman. International shipments increased 8%. Both are down from double-digit increases a year ago. But when it comes to Internet plays, fundamentals rarely get in the way
of a good story.
The story here is this: If more of us sit in our bathrobes at home ordering from Amazon.com, Victoria's Secret and a thousand other Internet retail shopping sites, someone will clean up delivering the goodies. The story picked up momentum in December following a breathless Barron's article that quoted FDX Corp. Chairman Frederick W. Smith as saying: "Wall Street doesn't really begin to appreciate FedEx's role in this huge commerce revolution."
There's just one problem with the Internet retailing story: Delivering packages to residences, where most Internet consumer-shopping packages are sent, isn't a very profitable business for FedEx.
Picture an orange-and-purple FedEx truck tooling through downtown. In an hour, the truck can make 15 to 18 deliveries, picking up packages to take elsewhere as it makes its stops, many of which are in the same building. The average revenue per delivery in a commercial area is about $28, says Pittsburgh-based transportation consultant Satish Jindel.
But when the same truck heads to the suburbs, it makes all of 9 deliveries an hour and rarely picks up packages to be taken elsewhere. The result: The average revenue per delivery to a house is just $10.40, says Jindel.
The predominance of commercial deliveries at FedEx affords the company an 8% overall operating margin ("operating profit" meaning profit before depreciation, interest and taxes). But the home deliveries, which account for perhaps 10% of the company's volume, contribute nothing to operating net, says Jindel. The company barely breaks even on residential traffic after deducting for labor and other expenses—like the liability if someone swipes the package from your doorstep.
FedEx officials aren't too eager to boost the residential business. Asked how they'll retool to address Internet retailing, FDX's chief information officer, Dennis Jones, is circumspect.
"It's an issue that requires us to solve it," he says cryptically.
Most retail shoppers on the Internet don't want to fork over extra money to get a package overnight. Only 2% of Internet shoppers said they received packages ordered on-line via overnight delivery, according to a recent survey from Zona Research in Redwood City, Calif. Most of the packages ordered on-line were delivered by the United Parcel Service or the U.S. Postal Service.
FedEx sees more potential in its home territory—business-to-business commerce. Its famed on-line tracking service aids this market. The future here lies in helping customers with supply chain management, inventory control, product assembly, distribution and billing. Technology will play a large role in FedEx's success or failure—and in that of archrival UPS.
"The transportation companies that invest in technology are going to do better than those that don't. But it's not going to cause someone who is going to buy one widget to buy two," says Theodore Scherck, president of the Atlanta-based Colography Group, a global transportation consulting firm.
Internet or no, Kauffman expects FedEx's earnings to fall 4% for fiscal 1999, to $560 million. He blames slowing demand for domestic overnight packages, sluggish international growth, pilot compensation costs and contingency expenses.
Pricing the stock at 25 times expected 1999 earnings—a ratio 58% higher than FedEx's five-year average—Internet-addicted investors are expecting more than FedEx may be able to deliver.
|
