Should You Invest in These 3 Air Freight Companies?

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With recovery in the U.S. economy, shipment volumes at freight companies is surging. According to an IATA report, freight volumes are expected to grow 5% per year until 2014, as international trade is likely to grow by 6% annually for the same period. Growth in the freight industry will significantly depend upon Asian countries, as it is estimated that the highest volume of growth -- 12% per year -- will be seen in this region. Additionally, China will account for one-third of total shipment volumes in 2014. The international freight market will be led by the U.S., as it will contribute around 8.8 million tons in 2014. 

Looking at the growth of this industry, I have selected three companies which will dominate the global market by expanding their footprints, use the latest technology, and focus on e-commerce.

Profit improvement plan

FedEx (NYSE: FDX) aims to improve its profits to $1.7 billion by the end of 2016. As a part of this improvement, the company will initiate a plan to update its IT structure and operations. It will result in improvement of its transaction processes and back office operations. This plan will be fully implemented by 2015, and profitability of the company is expected to improve by $500 million in 2016.

Also, to meet targeted profit, FedEx recently kicked off a voluntary buyout plan for its employees. This plan will be implemented in three phases, and will save around $350 million until the end of 2015.

The United States Postal Service, or USPS, recently renewed its seven year contract with FedEx for $10.5 billion. In the previous contract, FedEx was generating revenue of $1.6 billion per year. Before the renewal, it was expected that FedEx would lose the contract to close competitor UPS (NYSE: UPS). However, FedEx won the contract due to a lower price bid. This contract accounts for 3.6% of total company revenue in the current fiscal year.

Betting on e-commerce

The U.S. economy is expected to grow by 2.5% in 2013. As a result, shipment package volumes are expected to grow as well. UPS' domestic segment saw a daily volume growth of 4.4%, quarter over quarter, in the first quarter of 2013. This segment contributes 62% to the overall revenue of the company. The main reason behind this is the increasing "business to consumer", or B2C, shipments. B2C shipments now contribute around 40% of the overall revenue in the domestic segment of UPS.

Sales from e-commerce are anticipated to increase to $259 billion in first quarter of 2013, an increase of 14.8% year over year. To capture more of the e-commerce market, UPS launched a tracking system a few years back, “On-Road Integrated Optimization and Navigation”, or ORION. To cater to the B2C market, ORION employs advanced algorithms to determine the optimal route for each delivery, while meeting service commitments and reducing mile-delivery-costs. Currently, UPS is using ORION in around 40 locations in the U.S., and is expecting to increase its use in other locations too.

Focusing on the domestic market to tap e-commerce with its tracking system, its total revenue is expected to surge from $23.1 billion in 2012 to $26.5 billion by fiscal year 2015.

Strong volumes in Asia

Airfreight trends in Asia are showing improvement in the first quarter of 2013, as shipment volumes in Hong Kong and Shanghai were up by 4% and 17%, quarter over quarter, respectively. Consequently, Expeditors International’s (NASDAQ: EXPD) shipment volume in these regions also increased by 10%. It posted shipment growth of 45% in the previous fiscal year in Asia. Expeditors International is mainly based in China and is well-positioned in other Asian countries. With growth in airfreight volumes, it is estimated that potential revenue growth of 12.5% will be achieved by the company in 2013.

Expeditors reported cash in hand of $1.4 billion in the first quarter of 2013. The company is well-positioned to repurchase 3.6 million shares in the second and third quarters of 2013. It is expected that around 6.1 million total shares will be repurchased in 2013. The company generates regular free cash flow of around $330 million annually, and had zero debt as of the first quarter of 2013.

Conclusion

Due to the low bid price of the USPS contract, FedEx's revenue will decline by $100 million per year. However, in the long run, the company will benefit from its cost reduction plans and is expected to improve profitability significantly. Though, increment in wages will negatively affect the profit of UPS in short term, growth in the U.S. economy  and e-commerce, will boost B2C volumes. Moreover, UPS' tracking system, ORION, will improve its profit in the future. Increasing volume will be beneficial for Expeditors, as it is well-positioned in the Asian market. Moreover, due to its share buyback program, the stock price has nice upside. I recommend investors buy all three stocks.

More from the Motley Fool

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century, and for some of the new kings of retail, shippers like the ones above play an important role. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. The Motley Fool owns shares of Expeditors International of Washington. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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