The world’s largest package delivery company, FedEx Corporation (FDX) has increased its freight rates by 6.75% on shipments covered under FXF 1000 and FXF 501 series base rates. The increased rates will be effective September 6, in the U.S., Canada and Mexico.
The rate hike comes close on the heels of the 6.9% freight rate increase by its peer, United Parcel Services (UPS) on non-contractual shipments to the U.S., Canada and Mexico.
FedEx' Freight segment returned to profits in the latest fiscal quarter after incurring losses for six straight quarters backed by a strong price recovery and streamlined cost structure. The segment provides less-than-truckload (LTL) freight services through its FedEx Freight business (regional LTL freight services) and its FedEx National LTL business (long-haul LTL freight services).
We believe the company will capitalize on capacity shortage in the freight market, and is well positioned to benefit from firming industrial fundamentals and LTL industry pricing discipline. The looming economic outlook should not bother FedEx much.
Continued focus on improving prices signifies FedEx’ initiative to substantially better its earnings power over the next several years. In early 2011, the company increased its general rate by 5.9% for FedEx Ground and FedEx Express shipments in order to solidify revenue generation and yield expansion in the these product lines.
Likewise, we expect the current price hike in FedEx Freight to support the company’s long-term goal of robust revenue and margin expansion as well as earnings improvement.
Apart from the pricing improvements, FedEx is working a series of initiatives that is expected to deliver industry leading margin and earnings growth over the long term. The company is expanding its international presence through the enhancement of existing routes as well as strategic acquisitions. The company acquired AFL Pvt. Ltd, a logistics, distribution and express business in India that strengthened its position further in the market. In addition, FedEx acquired MultiPack, a Mexican domestic express package delivery company in the second quarter of fiscal 2011.
Going forward, FedEx expects to invest $4.2 billion in fiscal 2012. About 60% of the investments are allocated toward growth projects, including the expansion of FedEx Express' Asian and European networks that remians accretive to revenue and earnings going forward.
However, FedEx is investing significantly in more fuel-efficient aircraft, including Boeing Co.’s (BA) 777s and 757s. Any delay in the delivery of aircraft could restrict its profitability ahead. Further, competitive threats, unionized workforce and rising fuel price may limit the upside potential of the stock.
Thus, we are currently maintaining our long-term Neutral rating on FedEx. The stock holds a short-term (1–3 months) Zacks #3 Rank (Hold) Rank.
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