The Logistics Powerhouse on the Cutting Edge of Innovation…
As blockchain technology becomes more ingrained in business practice, the enthusiasm for the growth of these innovations is growing substantially.
according to James Altucher report, FedEx (FDX) in 1974 was on the verge of bankruptcy. The company was millions of dollars in debt and didn’t have sufficient funds to pay its outstanding bills. It got so bad that it began asking its pilots to use their own personal credit cards to fuel planes, before long, the company had just $5,000 in cash.
As a final “Hail Mary,” FedEx founder Fred Smith did something extreme — you might even say reckless. With the remaining company funds, Smith flew to Las Vegas and sat down at the blackjack table, playing hand after agonizing hand. Several turbulent hours later, Smith had pulled off the unthinkable… Chips in hand, he approached the casino cage with roughly $27,000 in winnings — enough to fuel his motley fleet of planes for one more week.
Not long after, Smith was able to raise an additional $11 million in funding — enough to keep the company afloat. Since that time, taking big risks has practically been in the company’s DNA. And doing so has frequently put it on the cutting edge of innovation. So, FedEx was the first to introduce a real-time package tracking system to help people keep tabs on their shipments. It was also one of the first to take advantage of cellular technology to enable package tracking in the field.
FedEx (FDX) and blockchain technology
Therefore, over the last 15 years, the company has invested heavily in automating over 130 of its facilities. It leverages state-of-the-art robotics for tasks such as sorting, and it utilizes software to help manage all elements of its facilities. In some of the more automated facilities, close to 80% of packages move through the winding maze of conveyor belts and sorters without any human labor at all.
Now is blockchain. Given the company’s ambitious technology projects, it’s no surprise that FedEx is one of the most vocal supporters in the push for blockchain in the supply chain.
In September, the company announced that it was joining companies like J.P. Morgan, Deutsche Bank, IBM and Intel as part of the Hyperledger blockchain consortium. Hyperledger is a collaborative effort by some of the largest corporations and academic institutions in the world to develop and promote cross-industry blockchain technologies. The initiative covers a broad range of sectors including finance, healthcare, government and logistics.
Hyperledger enables organizations to build robust, industry-specific applications, platforms and hardware systems to support their individual business transactions by creating open source distributed ledger frameworks and code bases. Prior to the announcement, FedEx was already a big proponent of blockchain.
In May, Smith gave a keynote address at Consensus, one of the most widely watched blockchain events. He described the massive potential of blockchain to reduce friction in cross-border logistics. Cross-border logistics are complicated — the standards, laws and terminology vary from one country to another. Blockchain offers a potential solution to make this information commonly available to everyone. Separately, the company is also investigating the use of blockchain to maintain a chain of custody for the logistics industry. This would allow end-to-end transparency all the way from the source to customer delivery. These initiatives are taking place both in-house and as part of the blockchain industry groups to which FedEx belongs.
In addition to Hyperledger, FedEx is a founding member of the Blockchain in Transport Alliance — a consortium of firms developing blockchain standards for the freight industry. It’s also a member of the Blockchain Research Institute.
Looking under the hood, the company is an international shipping behemoth with over 670 aircrafts, 425,000 employees and 175,000 motorized vehicles — all working in collaboration to deliver an astonishing 14 million daily shipments.
Without a doubt, FedEx’s vast logistics infrastructure provides global scale and a defensible moat against outside competitors. And while some have raised concerns about Amazon’s increasing push into transport and logistics, I believe that these fears are overblown. For one thing, in order for Amazon to truly pose a threat to FedEx, it would need to replicate the company’s 40 years of experience in complex logistics expertise. Even Amazon, with all its funding and top-tier talent, will have a hard time replicating the knowledge and infrastructure that FedEx has built over the years. Secondly, let’s not forget the vast suite of services offered by FedEx. In addition to the company’s core air service, it provides (among other things) ground package transit, freight, and FedEx Office, where you can copy, print and ship.
The company estimates that 96% of customers use two or more of these services. In other words, in order for a competitor (such as Amazon) to truly pose a threat, it would have to offer the full suite of services currently offered by FedEx. Finally, FedEx is in no way dependent on Amazon. Unlike rival UPS, revenue generated by the eCommerce giant represents less than 3% of FedEx’s revenue.
This is notable — the company has achieved its phenomenal success by riding the tide of global trade and eCommerce growth, without significant contribution from Amazon. That is to say, Amazon represents just one player in the vast growing eCommerce landscape. As Amazon seeks to become a bigger player in the logistics and transportation space, an increasingly. Fragmented set of eCommerce competitors will grow to rely on shipping companies like FedEx as a trusted ally for their logistics needs. To service these companies, FedEx has been increasingly offering additional services. For example, the FedEx return service makes it simple for online retailers to issue shipping labels to customers to return products. Separately, the company has more than 11,000 locations where customers can securely pick up packages. When it comes to financials, the company is no slouch.
In 2018, the company’s revenue grew by 8.6% to $65.5 billion, while adjusted EPS grew by 26.6% to $15.31 per share (from $12.09 per share in 2017). The company recently announced that it will be expanding its delivery schedule for FedEx Ground from five days per week to six — allowing it to better utilize its extensive fixed assets and increase capacity with minimal additional capital expenditure.
Operational enhancements like this are one way the company hopes to achieve its ambitious financial goals, including continuing to increase EPS 10–15% and achieving a 10%+ operating margin. That’s not to say it’s all smiles and sunshine. In recent months, the company’s stock has been used as a barometer for speculation on the impact of U.S./ China tariff negotiations. And while this has weighed heavily on the share price over the past few months, the company has stated repeatedly that the actual impact on the business is not anticipated to be significant.
On top of that, last month the company’s stock took a hit as its earnings were negatively impacted by increased labor costs in the first quarter. This was despite the fact that revenue and pretax income were both up over 11% year over year. In fact, the company even went so far as to raise EPS guidance for the full year by $0.20, despite the quarterly setback. As astute value investors, we know a good thing when we see one.
The company currently trades at just 14.6x forward earnings (compared to the broader market, which is trading at 16.9x forward earnings). And with the stock currently underperforming the S&P 500 by nearly 15% year-to-date, I believe now is a good time to cash in on this undervalued logistics play. Takeaway: Given FedEx’s ambitious technology investments (including blockchain), its defensible
position as a logistics leader, its ongoing commitment to developing new services and implementing operational enhancements, and its attractive valuation, I’m extremely bullish on the stock. I advise readers to buy FedEx (FDX) up to $255 per share.