A Softer Landing for FedEx?


By Sam Jaffe On Oct. 12, when news of the first anthrax contamination in New York broke, investors wondered whether to flee FedEx Corp. (FDX) stock. If anthrax was being sent in the mail, did it mean bad things for the world's largest private-sector express-delivery company? Perhaps not. Although on Oct. 12 the stock dropped 5%, to $38.09 a share, since then it has held steady, closing at $38.40 on Oct. 22.

Turns out that postal bioterror attacks would be very difficult to carry out via FedEx. One reason the assailants likely chose the U.S. Postal Service is that it allows for anonymous transactions. You can buy a stamp and send a letter without ever revealing your identity (see BW Online, 10/19/01, "Postal Security Is Hardly First Class").

Any FedEx delivery, by contrast, necessarily leaves a paper trail. You have to write a check or use a credit card to send a package. In the few cases where FedEx accepts cash, you have to enter a FedEx office, which is probably being videotaped, to finish the transaction. By forcing a paper trail, chances are good that terrorists would shy away from FedEx.

SAFE SERVICE. In a perverse way, the anthrax attacks might end up giving a short-term boost to FedEx' business. The company won't discuss its volume numbers for the current quarter, which began on Sept. 1, but it's not hard to envision that business might actually be up. As more and more people choose not to open their mail, a FedEx delivery is one way of ensuring that a document gets to its intended recipient.

Of course, the September 11 attacks still need to be confronted. Most FedEx shipments are transported in airplanes. When all flights were grounded for a week in the immediate aftermath of the attacks, that included FedEx flights, even though they didn't carry passengers. Now that the aviation system is running again, FedEx is operating at full schedule. That's not true of the Postal Service, which used to ship many of its Priority Mail packages on passenger jets -- a practice that the Federal Aviation Administration has stopped for security reasons.

Even the effect of the weeklong grounding of cargo flights will probably be ameliorated by FedEx' portion of the government airline bailout. Bear Stearns analyst Ed Wolfe, who has a neutral rating on the stock, thinks FedEx would probably get 10% to 25% of the $500 million set aside for cargo airlines, which comes out to between 10 cents and 26 cents per share. "There is a good chance of such a onetime payment over the next few months, which could offset most of their loss from not doing air express business a few days," said Wolfe.

FIRST TO GO. Assuming that Wolfe is right, there's still the little matter of the economy for FedEx investors to deal with. The company is extremely economically sensitive. When things are going well, everyone wants to ship packages by FedEx. When the economy turns down, it's one of the first things to be cut. Says Morgan, Keegan & Co. analyst Robert Hatfield, who has a buy rating on the stock: "Everything centers on when you think the recession ends and when things return to normal."

A dismal economic environment is already priced into the stock. After all, it's down 23% from its 52-week high in mid-November of $49.85 a share. But if things get a lot worse, there's still room for downward movement. Yet the stock has rebounded from around $33 a share just after the terrorist attacks.

Timing is crucial, and it makes a correct economic forecast all the more important in determining how to value this stock. To gauge just how difficult that is, consider what CEO Fred Smith said on Sept. 20 in his last public comments on a short-term forecast: "The crystal ball is very cloudy, and we don't have enough visibility to make an accurate and useful forecast" for the present quarter. That was a little more than a week after the initial terrorist attacks, so analysts expect the company to come out with some kind of guidance by the end of October.

ADAMANT POSE. One measuring stick is UPS (UPS), which reported results on Oct. 18 for its third quarter, which ended Sept. 30. Earnings were down 18%, to 50 cents a share, vs. the third quarter of 2000. Yet UPS still saw its revenue increase $100 million, to $7.5 billion, for 2001's third quarter.

The market has already built into FedEx' stock price a greater decline in profits and sales. Analysts currently expect FedEx to earn 52 cents in its current quarter, vs. 67 cents in the same quarter of last year, on about $5 billion in sales. Those numbers could fall if FedEx downgrades its economic forecast in the next few weeks.

However, the company has been absolutely adamant that it'll be profitable for the fiscal year that ends next June. It can feel confident saying that because cutting costs is relatively easy for FedEx, thanks to its flexible workforce. The company estimates that it has reduced headcount by 5,500 in the last few months without resorting to layoffs. It's able to do so through attrition and by reducing the hours of part-time workers, a group that makes up a majority of the FedEx labor force.

FUEL FOR RECOVERY. Another thing working in FedEx' favor right now is the price of fuel. Although FedEx is less exposed to fuel-cost risks than many assume, thanks to a variable surcharge customers pay that fluctuates according to jet-fuel prices, fuel still makes up a major portion of the company's expenses. But in the past few months, jet-fuel prices have fallen to as low as 70 cents a gallon, vs. their 52-week peak of $1.04 last fall.

As a result, FedEx just announced a lowering of its fuel surcharge from 4% to 3%. Even so, the company has felt the pleasant effects of declining prices while the surcharge was still high. "They get an extra kick when fuel prices fall more quickly than they can adjust the surcharge, which is what's been happening in the past few months," says Morgan Keegan's Hatfield.

Considering how hard FedEx has already been hit by economic worries and unfounded fears of its exposure to bioterrorism, the stock clearly looks undervalued now, assuming that you don't expect an economic catastrophe on the horizon. But if you expect recovery sometime in 2002, keep in mind that FedEx' stock will react very quickly beyond the small rebound it's already showing and probably won't be as cheap as it is today. Jaffe writes about the markets for BusinessWeek Online in our daily Street Wise column

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