BUSINESS AT NET SPEED
for June 22, 1998 issue
Investors
looking for a
low-volatility
Net play might
find a good
one here
By now, investors can find plenty of public companies that are
direct plays on commerce done over the Internet. Bookseller
Amazon.com (AMZN), music-CD purveyor N2K (NTKI), and
online travel agent Preview Travel (PTVL) are just a few of the
Internet stocks that have doubled or tripled in price this year --
despite the fact that they aren't expected to be profitable for a
year or more. In recent weeks, Internet stocks have suffered a
correction, confirming many investors' suspicions that a
speculative bubble has been building in the sector. N2K, for
example, traded around 13 in January, shot up to 34 in April, and
closed on June 11 at 16 3/4.
If this kind of volatile high-flier doesn't fit your concept of
prudent investing, plenty of established companies also stand to
benefit from the growth in electronic commerce. Federal Express
(FDX) is the favored "closet" Internet play of Karl Mills, a
principal at Jurika & Voyles, an Oakland (Calif.) firm that
manages $7 billion in institutional accounts and $250 million in
three no-load mutual funds using value-oriented strategy.
Federal Express has been a pioneer in using the Web to better
serve its own customers, and it has also played a significant role
in helping customers move their businesses online. If electronic
commerce fulfills even a fraction of its vast potential -- and if a
huge numbers of ordinary folks start shopping from home -- the
company's shipping volume should surge. With its strong brand
name and technological lead, FedEx is poised to take a larger
share of the delivery business than competitors UPS and Airborne
Freight (ABF).
BITS TO BOXES. The image of E-commerce is of people
going online to order what they want. But "at some point, all
those bits turn into boxes," says Mike Janes, FedEx'
vice-president for electronic commerce and logistics marketing.
(With the acquisition of trucking company Caliber System earlier
this year, Federal Express became a subsidiary of holding
company FDX Corp.)
And when people start ordering online en masse, Mills thinks
they will want those goods to arrive as fast as possible. "The
Internet is about instant gratification," says Mills. "You want the
thing now, and FedEx plays right into that."
FedEx' online retail accounts include L.L. Bean and
Williams-Sonoma, but such shipments are only a fraction of its
business. For now, the vast majority of shipments processed
online are business-to-business transactions from the likes of
Cisco (CSCO), Dell Computer (Dell), and Insight Direct, a direct
marketer. FedEx now processes two-thirds of its 3 million
shipments each business day through electronic networks,
including its private networks and its Web site. With that kind of
a percentage, "it's hard to disconnect our E-commerce strategy
from our overall business strategy," says Janes.
Even before it generates more volume, FedEx's E-commerce
strategy should cut costs. Fedex.com launched way back in
November, 1994, to rave reviews because it allowed customers to
track packages all over the world -- one of the first truly useful
Internet applications. It now receives 1.7 million tracking
requests per month, saving the company the cost of handling
those requests through phone calls. (FedEx declined to give
specifics on the savings.) With "FedEx interNetShip," launched in
July, 1996, the shipper's customers can also arrange for
deliveries through the Web by filling out an electronic airbill and
printing out their own label.
LONG-TERM PLAY. Still, while Wall Street applauds
FedEx's technological innovations, analysts are far from
unanimous on the stock. According to First Call, of 12 analysts
surveyed, four rate it a strong buy, three as a weak buy, six as a
hold. Consensus earnings estimates for the company's 1998 fiscal
year (which ended in May) are for $3.88 a share, up from $3.12
last year. In 1999, the company is expected to earn $4.31 per
share.
Few analysts seem to have high hopes for its Internet strategy
amounting to much over the next few years. "It's wonderful to
talk about this stuff, and I imagine that over time they will
become one of the airlines of the Internet," says John Pinkavage,
an analyst with SBC Warburg Dillon Read. "But that doesn't do
anything for the next couple of quarters or even the next couple
of years. People are impatient these days."
Near-term, the company has plenty of non-Internet issues to
contend with. It has to sign a new contract with its pilots;
Teamsters are trying to organize its ground workers; and the
Boeing 727s it flies may need costly repairs, says Stephen Klein,
an equity analyst with Standard & Poor's. Other analysts are
concerned about the effects of the economic crisis in Asia, where
Federal Express generates roughly one-third of its revenues. UPS
and Airborne have also been stiff competitors on pricing lately.
Ultimately, what concerns analysts most is whether FedEx can
improve its profitability. A recent rise in two-day deliveries has
hurt margins, says Steven Colbert, an analyst at Mills's firm. The
company also needs to reduce the cost of delivering into the
residential market -- especially if E-commerce booms. Its
acquisition of trucking company Caliber could be a key to
reducing those costs, Colbert believes. The stock fell sharply last
September after the Caliber deal was announced (and as Asia's
crisis worsened) because investors were concerned that FedEx
was getting into a low-tech business, says Klein. The stock fell
from a high of 84 to 55 by December. It recovered some of those
losses early in the year and closed on June 11 at 61.
'NOSEBLEED LEVELS.' With so many looming concerns
about the company, why buy FedEx and not one of the hot
Internet stocks? "There is a little thing called valuation that gets
in the way," Mills says. While other Internet plays are "at the
nosebleed level," trading at multiples of anticipated future
revenues (not earnings), FedEx is trading at only 15 times this
year's earnings. That adds up to about a 30% discount to the rest
of the market. "With lower valuations, there should be less risk
built into the price," says Mills. He expects the company to grow
at about 15% a year over the next three years.
Suzanne Betts, an analyst with Goldis-Pittsburg Institutional
Services, raised her rating on FedEx to a buy on June 11 mainly
because of its low valuation. She cut the stock to a hold back in
March when it was trading at 73. The company had benefited
from low fuel costs, but she was concerned then that those costs
would rise by yearend. She was also concerned about price
competition from UPS and the effects of economic problems in
Asia. "Now the market has taken those things into account, and it
has come back down into more of a buying range for us."
"The shareholder hasn't seen the benefit of a lot of the things the
company has been doing," says Paul R. Schlesinger, an analyst at
Donaldson Lufkin & Jenrette. "For the perceived quality of the
brand name, the financial performance has not kept pace." But,
for value investors who anticipate that FedEx' strategy will pay
off, particularly its embrace of E-commerce, that's exactly why
now could be a good time to buy in.
By Amey Stone, Associate Editor, Business Week Online
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