Changes in Logistic Trends
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The world economic crisis has hit logistics companies differently. The logistics trend is shifting from priority services, such as airlines, towards cheaper and slower forms of delivery like ground transport. This has affected traditional logistics companies such as FedEx (NYSE: FDX), United Parcel Service (NYSE: UPS) and CH Robinson (NASDAQ: CHRW) in diverse ways. Let’s take a look at each for further analysis.
UPS: The e-commerce solution
UPS, as a company, has been recovering quickly from the financial meltdown amid shipments decline from Asia to the US. Its stock price surged 11.6% from June 2012 to present date even after the failed acquisition intent to buy TNT Express for a hefty $7 billion. European regulators blocked the deal alleging that reduced competition could hurt consumers. This left UPS with no choice other than growing through smaller acquisitions or organically.
UPS posted solid first quarter results with revenue up 2.2%, totaling $13.43 billion, and flat operating margin at 11.8%, compared to the same quarter the prior year mainly driven by e-commerce related deliveries. The company is properly positioned to take advantage of the e-commerce segment, a catalyst for growth that has taken everybody by surprise.
The company ended the first quarter with $1.4 billion in free cash flow and $7.3 billion in cash and marketable securities, which exhibits the financial strength the company is enjoying. UPS also has the best operating margin with 14.2% compared to peers such as DHL at 7.8%, FedEx at 7.7% and TNT at 2.9%. Finally, the company also improved deliveries that amounted to 16.2 million packages per day showing a 4.1% increase over the prior year quarter. The company is an excellent bet as it continues to deliver profits in a challenging environment.
FedEx: Business restructuring
Although FedEx’s stock price has improved 11.7% from June 2012 to present date, investors are wearisome as the company needs to modify some aspects in its business model. Why? Because of the meager results exhibited on fiscal 2013. As Mr. Frederick Smith, chairman, president and FedEx’s CEO, stated: “These positive developments did not fully offset tepid economic growth and customer preference for less costly international shipping services,” which is the reason the company is under pressure. When it comes to business models, as mentioned in this interesting blog post, Warren Buffett and other prominent investors select stocks with durable competitive advantages.
For 2013, the company posted an increase of 3.7% in revenue totaling $44.3 billion, but had problems controlling its operating expenses as the operating margin fell from 7.5% to 5.8% from 2012 to 2013 resulting in a 23% decline in net income, which stood at $1.56 billion. One of the measures the company has implemented is a voluntary employee separation program in which 3,600 employees will be cut from the workforce as well as a reduction in its aircraft fleet. The company is on the right track, as cutting costs, especially those related to the underperforming segments, could improve operating margins and help achieve the projected EPS growth of 7% to 13% for 2014.
CH Robinson: Recovery will take some time
CH Robinson did not follow the fate of its peers regarding its stock price, as it has declined 5.5% from June 2012 to present date. Similar to FedEx, CH Robinson posted a revenue increase of 17.3% totaling $2.9 billion for the first quarter compared to the same quarter last year, but incurred in a 17.1% increase in operating expenses that had a negative effect on net income as it was reduced 3% at $103.3 million. As Mr. John Wiehoff, chairman and CEO, indicated, the company’s first quarter results “reflect the slower growth and continued margin contraction that we have seen in the markets we serve.”
The company has divested its payment services segment, T-Check, which has had a negative impact on its latest results: net revenues for this segment decreased 83.2% to $2.6 million for the first quarter of 2013 compared to the same quarter the prior year. This is a good signal as the company is trying to return to previous growth figures. The company has also been affected by its acquisition of Phoenix International Freight Services in 2012 that has a higher operating expense to net revenue than CH Robinson. This is expected to diminish on the future quarter results and therefore generate more profits. But that will probably take some time and investors should expect improvements further down the road.
UPS has shown that it can continue delivering profits amid the sluggish demand the air cargo and logistics sector is experiencing. It has improved its position in the e-commerce segment and had a healthy balance sheet this last quarter: it ended the first quarter with $1.4 billion in free cash flow and $7.3 billion in cash and marketable securities. This makes UPS a great stock to look at.
FedEx is another company that suffered the trend for less expensive transport demand but it did not follow UPS’ success. Although the company increased its revenue for 2013, it had some issues controlling its operating expenses which had a huge impact in the net income result. Cutting its workforce and aircraft fleet will reduce costs, but will also diminish its global presence and logistics capacity. Investors should wait for this one.
CH Robinson could have some upside in the following quarters, mainly given by Phoenix’s acquisition. Once CH Robinson can stabilize the acquired company’s operating expenses, this could generate better profits. The company is trying to divest non-core assets, such as it did with its payment services, but it will have to do more as margins contraction and declining demand could be a problem.
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Vanina Egea has no position in any stocks mentioned. The Motley Fool recommends 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!