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FedEx Ground Margins Grappling With Wage/Cost Inflation, but Improvement Still Likely

Business Strategy and Outlook

Overnight delivery pioneer FedEx is one of three large national carriers that dominate the for-hire small-parcel delivery landscape–FedEx and UPS are the major U.S. incumbents, while DHL Express leads Europe. Rival UPS has been around much longer in the U.S. ground market, forging a density advantage and higher margins, but FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment.

Leading up to the pandemic, ground margins were grappling with heavy network investment, the gradual mix shift to lower-margin B2C deliveries, lost Amazon revenue, and a pullback in B2B shipments. That said, the pandemic driven e-commerce shift and related surge in residential package delivery demand, coupled with a massive uptick in parcel carriers’ pricing power drove a resurgence in FedEx’ profitability. Recovering B2B activity has also played a material role. Material labor constraints emerged in recent quarters, setting margins back . Therefore, Morningstar analysts assuming management will be able to mitigate some of these headwinds with increased productivity, and ground margins should see some recovery in the quarters ahead.

In general, FedEx’ extensive international shipping network is extraordinarily difficult to duplicate and domestic/international e-commerce tailwinds should remain favorable for years to come (outside a major recession). Despite Amazon insourcing more of its own U.S. last-mile package deliveries, FedEx continues to bolster its ground and express capabilities and is well positioned to serve the myriad other retail shippers pursuing e-commerce, not to mention its entrenched relationships in B2B delivery. The TNT integration has made headway, and expects efforts to bear more fruit in Europe as FedEx finalizes the integration by May 2022.

Financial Strength

Total debt approached $21 billion as of fiscal year-end 2021 (ended May), down slightly from $22 billion in fiscal 2020. Since May 2017, FedEx has borrowed around $7 billion (net) to finance aircraft purchases, sorting facility expansion and automation, pension funding, dividends, and periodic share repurchases. This partly reflects $3 billion of unsecured debt issued in April 2020 to increase financial flexibility as the pandemic hit, and to pay off part of its commercial paper program. FedEx ended fiscal 2021 with $7 billion in cash and equivalents, up from $5 billion. Total debt/adjusted EBITDA came in near 2 times in fiscal 2021, which represents improvement from 3.3 times in fiscal 2020, as the operating backdrop improved significantly. We expect that metric to hold relatively steady in fiscal 2022. Adjusted EBITDA excludes mark-to-market pension charges and nonrecurring costs.

Bull Says

  • Outside a prolonged recession, FedEx’s U.S. ground package delivery operations should continue to enjoy robust growth tailwinds rooted in favorable ecommerce trends.
  • FedEx’s massive package sortation footprint, immense air and delivery fleet, and global operations knit together a presence that’s extraordinarily difficult to replicate.
  • During its nearly five-decade history, FedEx has weathered multiple economic cycles. While short term results may suffer, the firm’s powerful parcel delivery network is firmly established.

Company Profile

FedEx pioneered overnight delivery in 1973 and remains the world’s largest express package provider. In its fiscal 2020 (ended May 2020), FedEx derived 51% of revenue from its express division, 33% from ground, and 10% from freight, its asset-based less-than-truckload shipping segment. The remainder comes from other services, including FedEx Office, which provides document production/shipping, and FedEx Logistics, which provides global forwarding. FedEx acquired Dutch parcel delivery firm TNT Express in 2016. TNT was previously the fourth-largest global parcel delivery provider.

 (Source: Morningstar)

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