Financial Analysis for FedEx Corporation
EXECUTIVE SUMMARY
The modern air/ground express industry was pioneered with the founding of Federal Express in 1971; the corporation was created in 1998 as FDX Corporation and became FedEx Corporation in January 2000 (FedEx, 2013).
FedEx provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services, offering integrated business applications through operating companies competing collectively and managed collaboratively, under the respected FedEx brand. FedEx inspires its more than 290,000 employees to remain absolutely, positively focused on safety, the highest ethical and professional standards and the needs of their customers and communities (FedEx, 2013).
FedEx showed real grit in FY12. FedEx’s earnings per share increased 40 percent, and annual revenues exceeded $42 billion, a 9 percent increase, despite political gridlock in the United States, financial turmoil in Europe, a slowing Asian economy and volatile fuel prices. FedEx Ground delivered an 18.4 percent operating margins and accounting for more than half of FedEx operating profit. Online shipments spurred record volumes. More than one quarter of FedEx Ground lanes are now faster in terms of transit times than the competition, boosting service and customer satisfaction to unprecedented levels. As a result, including FedEx SmartPost, FedEx’s overall U.S. ground parcel-market share has increased to nearly 30 percent, doubling over the last decade. The rapid transformation of FedEx Freight paid off with a strong return to profitability. Revenues grew 8 percent year over year. Offering both priority and economy service options and industry-leading transit times have made FedEx Freight a market share leader (FedEx, 2013).
This paper addresses current status of FedEx Corporation and how they are performing. The paper addresses FedEx’s SWOT analysis giving their strengths, threats, weaknesses, and opportunities. The paper gives recommendations and then follows with justifications for those recommendations to FedEx’s Corporation management.
SWOT ANALYSIS
A SWOT analysis is a look at FedEx’s strengths, weaknesses, opportunities, and threats, and is a way to gain a detailed and thorough perspective on the company and its future.
Strength
* Strong brand image
* Unmatched reputation for on-time delivery
* Lots of planes, well-located hubs, great routes/landing rights
* Ranked as one of the best companies to work for many years in a row
* Great R&D, quite innovative
* Extensive capital expenditures
* Focus on customer satisfaction
* Clear leader in domestic express delivery market
* At present, drivers are independent contractors, unlike at UPS where they are unionized
Weakness
* High prices relative to competitors
* Not as strong internationally
* Lag UPS in the ground delivery market
* Not fully differentiable from UPS
* Very exposed to economic conditions and fuel prices
Opportunity
* Economy is beginning to recover, especially in Asia (China specifically)
* Currently offer services to 220+ countries and barring government intervention, can expand in them as it sees fit
* Continued globalization of the world marketplace means more contracts are available and at higher volumes as well
* Expansion of online retailing creates an increased need for on-time, hassle-free shipping
* Focus on taking away international market share from DHL and domestic ground delivery from UPS
Threats
* High fixed costs
* Drivers and other workers are trying to unionize
* Economic downturn has cut down on volume overall
* Many consumers and businesses are switching to slower delivery options to save money
* UPS is attempting to take away market share in the express delivery arena
* E-mail may take away from overnight document delivery market
FedEx possesses several strengths, weaknesses, opportunities, and threats; however in the end appears to be a financially strong company with a predictable future (Guenette, 2012).
RECOMMENDATIONS AND JUSTIFICATIONS
RECOMMENDATION#1: Should the firm increase their capital expenditures to increase competitiveness? This will almost always be true but what segments of the business get the most capital allocated to them and why?
Yes, by increasing competitiveness FedEx would increase revenue and reduce cost through tighter integration and consolidation, improve/increase productivity, and reduce capital expenditures. New capital expenditures would help the company make additional revenue (Collins, 2010).
RECOMMENDATION #2: Should the firm increase growth by acquiring other companies for synergies or grow internally? Do they have the infrastructure to grow internally? If they by a competitor, how will the merger be integrated in regards to culture, overlapping businesses, etc.
FedEx should increase growth internally. FedEx should invest in growth in a number of ways: people/training (customer service), capital (facilities and equipment upgrades), and advertising (product and services). Internal growth will inevitably cost money in the short-term, but the returns on these investments should outweigh the money spent over time. The business size will not necessarily increase because of internal growth, but the quality of the business will. As the US economy recovers in the coming years, consumers and small businesses will once again require more of the services that FedEx offers. FedEx should make it be known that FedEx Office is a retail storefront for which all of the company’s other services can be utilized.
RECOMMENDATION #3: Should the firm risk increasing their leverage (debt) to increase earnings and return on capital or keep the leverage the same (or even decrease it). If so, why and by how much.
Yes, FedEx should increase their leverage to increase earning because in the real world, where companies must pay taxes, leveraging a firm does create value because a firm can deduct interest payments against its corporate income taxes. Increasing leverage therefore creates tax savings and increases the value of the firm. FedEx managers should be cautioned that increasing leverage also increases risk. A highly leveraged firm may be overcome with debt and runs the risk of going bankrupt if it cannot pay off its debt.
Equity has a higher cost of capital, debt carries higher financial risk. As debt increases as a percentage of the company’s capital, leverage increases as well do as the chances of financial distress or default. Lowering financial leverage will absolutely lower the financial risk of the company; however, it may not lower the total risk.
RECOMMENDATION #4: Should they increase marketing spending? If so, by how much and where should it be allocated. Should online marketing spending and international marketing increase by more than print ads? Justify any additional spending that is recommended.
FedEx should increase its marketing spending by $200.5 million, with $125 million to be spent on advertising. When people need something delivered quickly, safely, and on-time, they say they need to “FedEx” it. FedEx should work to maintain a controlling stake in the express delivery market while stealing share from UPS in domestic ground delivery by further differentiating itself from UPS through actual innovation and service offerings and/or through manipulation in consumer perception. An issue with the shipping business is that buyers generally have little to no brand loyalty and incur negligible switching costs when changing from one provider to another. FedEx should secure more business partnerships, even at slightly lower margins, which will help to develop loyalty to the brand. (Amsler, Cullen, and Erdmenger, 2010).
RECOMMENDATION #5: How should they go about controlling costs including labor, health care, and pension liabilities? (GM and Ford need help in this department).
* Offer employees flexible work schedules.
* Don't pay overtime unless it is absolutely necessary. Go over the essential labor needs and figure out how to more efficiently get the work done without pushing the staff over 40 hours.
* Use a staffing agency to fill certain positions.
* Implement a periodic review process for analyzing the investment strategies utilized by the fund's investment managers. As part of this review process, develop a database of comparably-sized pension funds used by the company’s business peer groups and conduct an apples-to-apples comparison with the fund.
* Establish a set of conservative metrics to govern the method by which cost-of-living allowances (colas) are issued to the retired plan participants.
* Reduce the benefits covered by FedEx’s insurance plans. Plans with fewer benefits generally cost less than those with more generous ones. Businesses can implement this change by limiting the plans from which employees can choose. Some cash-strapped businesses are passing on a greater portion of the cost of coverage to employees. Instead of splitting the premium cost so that the employer pays 50 percent and the employee pays 50 percent; the employer shifts a greater portion of his share to the employee, so the employer now pays 25 percent and the employee pays 75 percent, but offer ways through a health reward program that could help offset a percentage of the cost.
* Provide employees the option to contribute to health savings accounts in lieu of health insurance or to supplement an existing plan.
EXECUTIVE SUMMARY
The modern air/ground express industry was pioneered with the founding of Federal Express in 1971; the corporation was created in 1998 as FDX Corporation and became FedEx Corporation in January 2000 (FedEx, 2013).
FedEx provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services, offering integrated business applications through operating companies competing collectively and managed collaboratively, under the respected FedEx brand. FedEx inspires its more than 290,000 employees to remain absolutely, positively focused on safety, the highest ethical and professional standards and the needs of their customers and communities (FedEx, 2013).
FedEx showed real grit in FY12. FedEx’s earnings per share increased 40 percent, and annual revenues exceeded $42 billion, a 9 percent increase, despite political gridlock in the United States, financial turmoil in Europe, a slowing Asian economy and volatile fuel prices. FedEx Ground delivered an 18.4 percent operating margins and accounting for more than half of FedEx operating profit. Online shipments spurred record volumes. More than one quarter of FedEx Ground lanes are now faster in terms of transit times than the competition, boosting service and customer satisfaction to unprecedented levels. As a result, including FedEx SmartPost, FedEx’s overall U.S. ground parcel-market share has increased to nearly 30 percent, doubling over the last decade. The rapid transformation of FedEx Freight paid off with a strong return to profitability. Revenues grew 8 percent year over year. Offering both priority and economy service options and industry-leading transit times have made FedEx Freight a market share leader (FedEx, 2013).
This paper addresses current status of FedEx Corporation and how they are performing. The paper addresses FedEx’s SWOT analysis giving their strengths, threats, weaknesses, and opportunities. The paper gives recommendations and then follows with justifications for those recommendations to FedEx’s Corporation management.
SWOT ANALYSIS
A SWOT analysis is a look at FedEx’s strengths, weaknesses, opportunities, and threats, and is a way to gain a detailed and thorough perspective on the company and its future.
Strength
* Strong brand image
* Unmatched reputation for on-time delivery
* Lots of planes, well-located hubs, great routes/landing rights
* Ranked as one of the best companies to work for many years in a row
* Great R&D, quite innovative
* Extensive capital expenditures
* Focus on customer satisfaction
* Clear leader in domestic express delivery market
* At present, drivers are independent contractors, unlike at UPS where they are unionized
Weakness
* High prices relative to competitors
* Not as strong internationally
* Lag UPS in the ground delivery market
* Not fully differentiable from UPS
* Very exposed to economic conditions and fuel prices
Opportunity
* Economy is beginning to recover, especially in Asia (China specifically)
* Currently offer services to 220+ countries and barring government intervention, can expand in them as it sees fit
* Continued globalization of the world marketplace means more contracts are available and at higher volumes as well
* Expansion of online retailing creates an increased need for on-time, hassle-free shipping
* Focus on taking away international market share from DHL and domestic ground delivery from UPS
Threats
* High fixed costs
* Drivers and other workers are trying to unionize
* Economic downturn has cut down on volume overall
* Many consumers and businesses are switching to slower delivery options to save money
* UPS is attempting to take away market share in the express delivery arena
* E-mail may take away from overnight document delivery market
FedEx possesses several strengths, weaknesses, opportunities, and threats; however in the end appears to be a financially strong company with a predictable future (Guenette, 2012).
RECOMMENDATIONS AND JUSTIFICATIONS
RECOMMENDATION#1: Should the firm increase their capital expenditures to increase competitiveness? This will almost always be true but what segments of the business get the most capital allocated to them and why?
Yes, by increasing competitiveness FedEx would increase revenue and reduce cost through tighter integration and consolidation, improve/increase productivity, and reduce capital expenditures. New capital expenditures would help the company make additional revenue (Collins, 2010).
RECOMMENDATION #2: Should the firm increase growth by acquiring other companies for synergies or grow internally? Do they have the infrastructure to grow internally? If they by a competitor, how will the merger be integrated in regards to culture, overlapping businesses, etc.
FedEx should increase growth internally. FedEx should invest in growth in a number of ways: people/training (customer service), capital (facilities and equipment upgrades), and advertising (product and services). Internal growth will inevitably cost money in the short-term, but the returns on these investments should outweigh the money spent over time. The business size will not necessarily increase because of internal growth, but the quality of the business will. As the US economy recovers in the coming years, consumers and small businesses will once again require more of the services that FedEx offers. FedEx should make it be known that FedEx Office is a retail storefront for which all of the company’s other services can be utilized.
RECOMMENDATION #3: Should the firm risk increasing their leverage (debt) to increase earnings and return on capital or keep the leverage the same (or even decrease it). If so, why and by how much.
Yes, FedEx should increase their leverage to increase earning because in the real world, where companies must pay taxes, leveraging a firm does create value because a firm can deduct interest payments against its corporate income taxes. Increasing leverage therefore creates tax savings and increases the value of the firm. FedEx managers should be cautioned that increasing leverage also increases risk. A highly leveraged firm may be overcome with debt and runs the risk of going bankrupt if it cannot pay off its debt.
Equity has a higher cost of capital, debt carries higher financial risk. As debt increases as a percentage of the company’s capital, leverage increases as well do as the chances of financial distress or default. Lowering financial leverage will absolutely lower the financial risk of the company; however, it may not lower the total risk.
RECOMMENDATION #4: Should they increase marketing spending? If so, by how much and where should it be allocated. Should online marketing spending and international marketing increase by more than print ads? Justify any additional spending that is recommended.
FedEx should increase its marketing spending by $200.5 million, with $125 million to be spent on advertising. When people need something delivered quickly, safely, and on-time, they say they need to “FedEx” it. FedEx should work to maintain a controlling stake in the express delivery market while stealing share from UPS in domestic ground delivery by further differentiating itself from UPS through actual innovation and service offerings and/or through manipulation in consumer perception. An issue with the shipping business is that buyers generally have little to no brand loyalty and incur negligible switching costs when changing from one provider to another. FedEx should secure more business partnerships, even at slightly lower margins, which will help to develop loyalty to the brand. (Amsler, Cullen, and Erdmenger, 2010).
RECOMMENDATION #5: How should they go about controlling costs including labor, health care, and pension liabilities? (GM and Ford need help in this department).
* Offer employees flexible work schedules.
* Don't pay overtime unless it is absolutely necessary. Go over the essential labor needs and figure out how to more efficiently get the work done without pushing the staff over 40 hours.
* Use a staffing agency to fill certain positions.
* Implement a periodic review process for analyzing the investment strategies utilized by the fund's investment managers. As part of this review process, develop a database of comparably-sized pension funds used by the company’s business peer groups and conduct an apples-to-apples comparison with the fund.
* Establish a set of conservative metrics to govern the method by which cost-of-living allowances (colas) are issued to the retired plan participants.
* Reduce the benefits covered by FedEx’s insurance plans. Plans with fewer benefits generally cost less than those with more generous ones. Businesses can implement this change by limiting the plans from which employees can choose. Some cash-strapped businesses are passing on a greater portion of the cost of coverage to employees. Instead of splitting the premium cost so that the employer pays 50 percent and the employee pays 50 percent; the employer shifts a greater portion of his share to the employee, so the employer now pays 25 percent and the employee pays 75 percent, but offer ways through a health reward program that could help offset a percentage of the cost.
* Provide employees the option to contribute to health savings accounts in lieu of health insurance or to supplement an existing plan.
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