E-Commerce Seems To Provide a Safe Harbor for the Shipping Industry
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FedEx (NYSE: FDX), the second-largest package delivery company, reported its second quarter earnings on Wednesday with weaker revenues compared to last year. Its profits took a hit because the operations of the company were hindered due to Hurricane Sandy. FedEx is a good guide about the economic progress of the US; as it moves goods such as pharmaceuticals, financial documents, and electronics. The company expects slow economic growth, but it is optimistic about its future.
A Dig into the Earnings
FedEx’s profit fell by 11.9% from a year ago to $438 million. This weakness is partly a result of Hurricane Sandy, which disrupted the transportation system on the East Coast for weeks. Revenue was 5% higher, on an annual basis at $11.1 billion, as the company downsized its operations to better match its demands. FedEx Ground's operating income increased 4% to $412 million in the quarter while Freight divisions operating income for the quarter improved significantly to $76 million. FedEx Express, the company’s core segment, fell 33% to $230 million from $342 due to continuous weakness in global markets.
Growth of E-Commerce the Bright Side
There must be weakness in the economy on the whole, but the company expects promising Christmas shopping. The growth of e-commerce companies like Amazon (NASDAQ: AMZN) means a lot of shipping business for delivery companies during the holiday season. Shopping over the web has increased this year compared to the last year’s season by 15%. Free shipping and other deals offered at e-commerce sites attract lots of customers. Traditional retailers like Wal-Mart have also entered the e-commerce market, thereby further adding business for FedEx.
Trying to Adapt
FedEx has ordered four freighter Boeings and in order to match the capacity timing in accordance with global demand it has postponed deliveries of two freighters to fiscal 2016 from 2015. The company is looking further to cut costs to deal with the sluggish economy. FedEx plans to cut annual costs by $1.7 billion within three years and for this purpose, the company is giving two years pay to its employees if they retire voluntarily from next year. For continued smooth functioning of the business the retirement will take in three phases. The program has multifold benefits like improved margins and cash flows along with increased competitiveness of the company.
How UPS Is Managing Via Amazon Effect?
United Parcel Service (NYSE: UPS), the largest name in the freight delivery industry too seems to be suffering from the current condition of the global economy. The yields look low but the volumes seem motivating. UPS’s third quarter profits were down by 56% in the third quarter mainly due to slower international sales. FedEx ground business is taking up UPS’s market share which shall better their position in the long run.
UPS seems optimistic about the plethora of packages (packages are expected to be around 135 million) it should deliver this holiday season as Amazon seems to be using its services well too. Amazon and by and large e-commerce as a whole can be said to have helped UPS (the freight business as a whole) to grow to such a large size. The shipping and freight business is expected to grow as not only retail but other businesses too are moving online.
The overall shape of the economy is not good, but FedEx has strategies in place to manage itself through the struggling economy. The record sales by most of the e-commerce retailers will help the company to meet its quarterly earnings target of $1.25 to $1.45 with ease. FedEx has its foothold in 220 countries with more than 3 million daily deliveries on average. The company is well managed and should perform well in the long run providing investors a safe bet for their money. United Parcel Service also has tremendous international growth prospects in the long run. It also pays a very good dividend that attracts investors. UPS too can be a part of an investor’s well-diversified portfolio.
tarunbachhawat has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com, FedEx, and United Parcel Service. 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!