FedEx Corp. (FDX:US) won a seven-year contract with the U.S. Postal Service valued at about $10.5 billion to carry mail between U.S. airports, fending off a challenge from United Parcel Service Inc. (UPS:US)
The new accord to fly Express Mail and Priority Mail starts in October once the current deal ends, FedEx said yesterday in a statement. The Memphis, Tennessee-based company didn’t give details beyond the value and length of the agreement.
The contract locks in FedEx’s business with the Postal Service and erases concern that it would lose some work to UPS as the U.S. mail carrier restructures after years of losses. FedEx has a larger U.S. air network and already has the labor and assets to handle Postal Service volume, most of which is processed during the day after the company’s premium overnight packages and documents have been cleared.
“This contract win is a sorely needed shot in the arm for FedEx,” Justin Yagerman, an analyst at Deutsche Bank in New York, wrote today in a note. He recommends buying the stock.
FedEx rose 1.4 percent to $94.46 in New York, while Atlanta-based UPS fell 0.3 percent to $83.50.
FedEx shares have tumbled 13 percent since reaching a 2013 closing high on March 15. The company cut its annual earnings forecast on March 20 as customers shift to cheaper deliveries.
Analysts such as Kelly Dougherty of Macquarie Capital Inc. in New York said FedEx investors were worried that UPS might have taken away as much as 30 percent of the postal business.
FedEx described its bid as “competitive,” which Dougherty said is a signal that it has lower profit margins than the current contract. Dougherty rates FedEx outperform.
Some analysts trimmed their earnings estimates for FedEx. Art Hatfield, of Raymond James in Memphis, lowered his estimates for fiscal 2014 by 15 cents a share, to $7.35, and for fiscal 2015 by 20 cents, to $8.60.
Although FedEx probably won the deal on “lower pricing,” it was better than losing the business to UPS, Hatfield said.
“We view this deal as the best FedEx could have hoped for,” wrote Hatfield, who rates the stock outperform.
The $1.5 billion-a-year contract implies about $100 million, or 6 percent, less in annual revenue, Deutsche Bank’s Yagerman said.
FedEx got about $1.62 billion from the Postal Service in fiscal 2012, up about 8 percent from a year earlier, according to estimates compiled by Washington law firm Husch Blackwell LLP, which tracks postal contracting. UPS got $126.4 million.
UPS said in July that it planned to fight FedEx for the postal contract, triggering speculation about what financial terms might be set after the Postal Service lost $15.9 billion in the fiscal year ending Sept. 30.
The Postal Service didn’t elaborate on those issues yesterday. The agency said in a statement that FedEx’s contract proposal represented the “best value,” and a spokeswoman, Katina Fields, declined to discuss specifics.
FedEx’s winning the sole award for the domestic airlift work was a “disappointment” to UPS, said Kara Ross, a spokeswoman for the world’s biggest package-delivery company.
“UPS has other contracts with the USPS and will continue to provide excellent service and the company looks forward to future opportunities to expand its business with the USPS,” Ross said in a statement.
FedEx has been flying for the Postal Service for 12 years, and the new accord provides more flexibility for possible changes as the service restructures, FedEx Express Chief Executive Officer David Bronczek said in the statement.
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