David G. Ross, CFA
We hosted a conference call with Rob Martinez, CEO of Shipware, LLC, a parcel auditing and consulting firm, to dig deeper into the announced 2012 air and ground rate increases of FedEx (FDX; Buy; $82.14) and UPS (UPS; $71.07; Buy). Below are key takeaways for UPS/FDX investors.
2012 rate increases [are] “good news for [UPS/FDX] investors, bad news for shippers,” as increases are likely to stick due to lack of shipper alternatives, complexity of the pricing structure and carrier discipline.
Many shippers are still highly inefficient, in our opinion, so we believe there is opportunity for cost savings even with rising rates through modal optimization (mainly more ground, less air).
Carrier cost increases that require rate increases are mainly labor (UPS Teamster contract) and technology – UPS alone spends over $1billion per year on technology to improve the customer experience from ordering to tracking to delivery.
2012 air and ground rate increase averages are misleading, as above-average increases were taken on lighter-weight packages and below-average increases on heavier-weight packages. According to Shipware’s large client database, 87 percent of its clients’ shipments weigh less than 30 pounds. Ten percent weigh 31-50 pounds, and 3 percent [weigh] more than 50 pounds.
We reiterate our Buy rating on the shares of both parcel carriers.
William J. Greene, CFA
Since FedEx’s last earnings update in September (which captured this summer’s volatility and uncertainty), a number of relatively constructive/bullish data points have emerged that give us confidence that FedEx’s [next] earnings report … will have upbeat commentary.
(1) On a macro level, the unemployment rate dropped below 9 percent to 8.6 percent, the lowest rate since March 2009. In addition, consumer confidence surprised investors with a large uptick in November, and early reports about consumer retail spending in November have been solid.