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FedEx is an attractive buying opportunity for long term investors

Last updated: 15:03 13 Nov 2009 GMT, First published: 16:03 13 Nov 2009 GMT

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Although we are likely at or around a near term top for equity markets, we remain of the view that any period of volatility will be short-lived. Equity markets will grind higher through the years ahead as the wider economic recovery becomes apparent through corporate earnings growth.


As the operator of the world’s largest express transportation company, FedEx’s business moves to the heartbeat of world commerce. This served as a significant headwind through the downturn. With the company’s year to May 2009 earnings almost undoubtedly representing a cyclical low though, FedEx presents an attractive buying opportunity for long-term investors.


Company History


The company’s history goes back to 1971, when one Frederick W. Smith purchased an Arkansas based used aircraft company for $95 million. The bulk of this investment he raised through venture capital, with “just” $4 million of his own equity. Mr Smith used his new fleet to provide an overnight mail service throughout America, which he later named Federal Express. He had identified the need for such a service through his previous studies at Yale University.

As is often the case, the company did not have a smooth run to success. Cash flow problems a few years into the business’ inception forced Mr Smith to approach potential lenders for additional capital. When this failed he is said to have fallen back on a less orthodox source of funding – the blackjack tables of Las Vegas.

His $27,000 takings from the tables proved sufficient to keep the planes in the air long enough for the business to become profitable. Federal Express turned its maiden annual profit in 1976.


Always quick to seize an opportunity, Federal Express swiftly filled the gap in the market left by the 1977 strike of competitor UPS’ workers. The bankruptcy of REA Express in the same year provided an additional opportunity for Federal Express to expand its industry footprint. This facilitated the company’s IPO, with the stock launching on the New York Stock Exchange in late 1977.

The company went from strength to strength through the 1980s. In 1981 television advertising saw the birth of the company’s now famous taglines, with the first being "Federal Express: When it absolutely positively has to be there overnight." The company’s sales hit the $1 billion mark in 1983.

It is important to note that Federal Express achieved $1 billion in annual sales through organic growth, rather than acquisitions. That soon changed though, with the 1984 acquisition of package courier Gelco Express. A raft of other acquisitions has since followed, launching Federal Express to truly global status.

Federal Express had grown into the world’s largest overnight delivery service in 1993, before becoming simply FedEx the following year. Mr Smith remains as Chairman and CEO to this day.
Business divisions and performance.


FedEx is comprised of three main divisions; FedEx Express, FedEx Ground and FedEx Freight.

FedEx Express is the core global transportation business, contributing around 63% of total group revenue. Although the slowdown has taken sales back to 2006/2007 levels, there remains considerable potential for future growth. This is particularly so when one considers the company’s expanding presence in China.

As the name suggests, FedEx Ground provides small-package ground delivery services. FedEx Ground has become an increasingly significant contributor to both revenue and earnings in recent years. The prospect of the division’s continued growth is particularly positive for FedEx’s earnings outlook, due to the division’s stronger operating margin.

In stark contrast to FedEx Express, FedEx Ground has proved remarkably resilient through the slowdown. The division delivered 4.4% sales growth in 2009 and 9.6% earnings growth. True to the company’s historic modus operandi, the division boosted volumes last year by swiftly filling the space left by rival DHL’s exit from the US market.

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