Highfields Capital sells its stake in FedEx in 1Q14

Market Realist

Highlights of Highfields Capital Management's positions in 1Q14 (Part 7 of 7)

(Continued from Part 6)

Highfields Capital Management and FedEx

Highfields Capital started new positions in Monsanto Co. (MON), Teva Pharmaceutical (TEVA), eBay Inc. (EBAY), and Exxon Mobil (XOM). The top positions the fund sold were United Parcel Service (UPS) and FedEx Corp. (FDX).

Highfields also exited a position in UPS rival and logistics bellwether FedEx (FDX) that accounted for 1.86% of the total 4Q  portfolio.

The Memphis-based FedEx provides a broad portfolio of transportation, e-commerce, and business services through companies competing collectively, operating independently, and managed collaboratively under the FedEx brand. Its primary operating companies are Federal Express—the world’s largest express transportation company, FedEx Ground Package System Inc.—a North American provider of small-package ground delivery services, and FedEx Freight Inc.—a North American provider of less-than-truckload freight services. These companies represent FedEx’s major service lines and, along with FedEx Corporate Services Inc., form the core of the company’s reportable segments.

Plus, the FedEx Services segment provides sales, marketing, information technology, communications, and back-office support to transportation segments. The FedEx Services segment provides customers with retail access to FedEx Express and FedEx Ground shipping services through FedEx Office and Print Services, Inc. and provides customer service, technical support, and billing and collection services through FedEx TechConnect Inc.

Severe weather affects earnings 

Like its rival, UPS, FedEx saw an impact from the severe winter weather on its fiscal 3Q 2014 results, which were announced in March. Earnings and revenue came in below street estimates. Revenue of $11.3 billion was up 3% from $11.0 billion. The company reported earnings of $1.23 per diluted share for the third quarter ended February 28, compared to $1.13 per share last year. The company said in its 10Q filing, “While our revenues and earnings increased in the third quarter of 2014, our results include a significant negative impact from severe winter weather across all of our transportation segments. Winter weather often impacts our third quarter results, but the impact of multiple severe storms during the third quarter of 2014 was more pronounced, reducing earnings by an estimated $125 million year-over-year. Our results for the third quarter also reflect a negative net impact of fuel.”

FedEx Express segment revenue falls

In terms of segments, FedEx Express segment revenue decreased slightly due to lower freight revenue, lower fuel surcharges, and the impact of the weather. FedEx Ground revenue was up 10% and average daily volume grew 8% in the third quarter, as growth in both FedEx Home Delivery and business-to-business services was driven by market share gains. FedEx Freight revenue of $1.35 billion was up 9% from last year’s $1.24 billion. Operating income improved from positive impacts of higher shipment volumes, heavier average weight per shipment, greater utilization of rail in the Economy service offering, and one additional business day.

FedEx said in its 10K filing, “During 2013, we saw a more challenging business environment — particularly for FedEx Express, as ongoing shifts from priority to deferred shipping services significantly impacted profitability.” So, the company implemented profit improvement programs in 2013 targeting annual profitability improvement of $1.6 billion at FedEx Express by the end of 2016. The plan involves cost cuts, the modernization of the aircraft fleet, and the adjustment of transportation networks to meet changing customer needs. FedEx added, “In the face of tepid global economic growth, shifting customer preferences and volatile fuel prices, we continue to adapt our networks, striking the right balance between volume and yield improvements.”

The company said in May that FedEx Freight will increase its published fuel surcharge indices by 3 percentage points, effective June 2, 2014, and FedEx Ground will apply dimensional weight pricing to all shipments, effective January 1, 2015. A Bloomberg report citing a BB&T Capital Markets analyst estimated this move will enhance FedEx Ground’s operating income by more than $180 million a year.

Lower full-year guidance

FedEx further commented, “While severe winter weather often affects our third-quarter results, the impact from multiple severe storms and frigid temperatures was significantly more pronounced this year and we are reducing our full-year earnings per share guidance as a result of the weather impact.” The company forecast earnings between $2.25 and $2.50 per diluted share in the fourth quarter and $6.55 to $6.80 per diluted share for fiscal 2014.

Why is competition intensifying?

Delivery delays during the holiday season have prompted e-commerce companies such as Amazon (AMZN) to test out their own delivery services, according to reports. Amazon already has Amazon Dash, a same-day delivery service for groceries. UPS and FedEx are also poised to see competition from private transportation startup Uber and Google, which are also testing same-day deliveries.

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