Evaluation of Future Prospects (FedEx)

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Evaluation of Future Prospects (FedEx)

The future financial prospects of FedEx are promising in spite of the challenges experienced in the express transportation and logistics industry. The goal of FedEx is to reach an improvement of $1.6 billion in terms of annual profitability by 2016 (FedEx Annual Report, 2015). Nonetheless, the ability to realize such an objective and perform better in the future depends on several of factors, including future customer demand, health of the economy, competition and rivalry, technological factors, possible entrants and close substitutes. Strong market position accompanied by the use of information systems and technology has strengthened the operations of the company (GlobalData, 2015).Nonetheless, strong competition, business seasonality, and foreign exchange risks could have significant effects its future operations. The purpose of this paper is to evaluate the influence of external factors on the future prospects of FedEx in terms of its financial performance, financial position and share price.

Financial Analysis for FedEx

The financial statements (Balance Sheet, Income Statement, and cash flows) of FedEx have indicated that in spite of economic challenges experiences in the industry, the company has been performing exceptionally in the last three years. For instance, being a strong brand operating in more than 220 countries and territories, FedEx generated $50.4 billion in 2016, which was an increase by 6% from $47.5billion in the previous year (FedEx, 2016b). The continued demand for FedEx services which are based on quality and satisfaction resulted into an increase in net income by 73% to $1.8 billion from $1.05 (FedEx Annual Report, 2016). Such an increase in revenue and net income is an indication of the promising success of FedEx in the future. Moreover, the operations of FedEx in more than 373 airports with over 650 aircrafts indicate the global presence of the company to meet the high demand of its services (GlobalData, 2015).

FedEx Corp.'s operating profit margin declined between 2014 and 2015 from 7.56% to 3.93% as a result of increased operational costs and expenses (Schmidt, 2015). Therefore, increase in operating costs in 2015 affected FedEx’s profitability. Moreover, the costs increased by 9.2% increase to $45,586 million from US$41 in 2014 (Global Data, 2015). The causes of increased costs were acquisitions in new companies such as TNT Express for $4.4 billion (FedEx, 2016a). Notably, TNT Express will begin to add valuable to FedEx by 2018, and it is until then when operating costs could decline. In spite of the increase in operating costs, the company is more likely to make profits in the future because its new acquisition has increased its market share and operations, especially in Europe. In the long-run, FedEx anticipates that the transaction will produce considerable improvements in earnings and revenue and decrease the current effective tax rate as a result of the increased international earnings.

FedEx Corp's current ratio increased from 1.82 in 2014 to 1.84 in 2015, and this was attributed to new acquisition. In addition, with an increasing debt/equity ratio it implies that that FedEx can easily finance its debts (Koller 2011). When a company is liquid it can settle its debts and implication that it does not have to incur extra costs such as debt financing for it to be successful (Peterson 2012). FedEx in the last three years generated strong cash flows indicating the liquid nature of the company. The Cash and cash equivalents of FedEx in 2015 totaled $3.8 billion compared to $2.9 billion in 2014 (FedEx Annual Report, 2015). Although in 2013-2014 there was a decline in cash and cash equivalents, it linked to the purchase of aircrafts. The purchase of new long-range Boeing 777 freighters is expected to minimize intercontinental delivery time, and reduce costs of operations (Smith, 2015). Continued effectives can thus increase the success of the company in the future.

Internal and External Factors Affecting FedEx the Financial Performance

Both internal and external factors are more likely to influence the financial performance, financial position and share price of FedEx. Some of these factors are technological, competition and rivalry, new entrants, and economic climate among others.

Competition and Rivalry

FedEx was founded with the intended of changing the manner in which delivery services operated before the 1970s. Its major competitors are United Parcel Service (UPS), The U.S. Postal Service (USPS), and Regionals as well as DHL.

 

 

 

 

 

 

 

 

Figure 1: FedEx Corporation Market Share. Schmidt. (2015).

In spite of the possible competition in the future from existing companies, small companies, and new entrants, FedEx Ground continues to be the fastest in delivery services in the U.S compared to the competition (FedEx Annual Report, 2015). Moreover, the company has continued to reshape its transportation business by investing $1.2 billion in 2015 in order automate and support its future growth (FedEx Annual Report, 2016).

The acquisition of TNT is expected to increase the market share of FedEx. For instance, FedEx is expected to gain significant market growth as a result of exposure in European market, where the company is currently absent. Thus, TNT acquisition is expected to lower the operational costs and expenses in Europe, thus improving profits. FedEx Annual Report (2016) indicate the TNT Express that the acquisition will not only broaden the company’s global portfolio, but will also offer FedEx with a global competitive advantage needed to enable it improve share price value in the long-run

Technological Factors

Technology and innovation creates a competitive advantage as well as a risk factor to a business. FedEx have adapted new technologies and innovations to provide its customers the easiest way possible to track and ship packages (FedEx Annual Report, 2016). The provision of great service could reduce operational costs and energy use, hence increasing its financial performance. For instance, FedEx Freight continued use of technology has shortened its travel times and enable national less-than-truckload service. Through the use of long-range Boeing 777 freighters, FedEx has minimized the intercontinental delivery time, hence effectiveness and delivery (Smith, 2015).

FedEx's future prospects according to ICRA Online depend on the domestic and global advancement of the e-commerce industry. For instance, in FedEx 2013 annual report, it was estimated that the Global e-commerce sales would be 2016 increase to $1 trillion, whereas the spending by online customers could be $371 billion by 2017 (ICRA Online, 2014). Given that FedEx has incorporated e-commerce in its operations, the company would benefit from such projections in terms of increased sales.

New Entrants

The presence of new entrants and players into the delivery business, could threaten the financial position and market share of FedEx. The major focus of the new entrants is on ground-based local same-day delivery services (Schmidt, 2015). This forms a small portion of FedEx’s portfolio. Nonetheless, the air cargo delivery industry which is main for FedEx’s capital intensive, and it cannot be easy for new entrants to compete with an already established networks by larger players. Thus, FedEx’s market share is more likely to increase in the future because regular persons and third parties delivering packages are not appealing to the end-uses (Schmidt, 2015). FedEx provides a high level of satisfaction when delivering its services, and this limits new entrants and competitors from negatively influencing the market share of the company. Small shippers such as Avon Products Inc., Walgreen Company, Eastern Connection, and Amazon.com Inc. pose competition to FedEx Corp, especially on the ground delivery (Stevens, 2013). Bring competition to ground delivery could threaten the financial position and market share of FedEx.

Regulation and Environmental Factors

According to FedEx Annual Report (2015), change in global regulatory and climatic environment can affect the profitability of the company. The U.S. Environmental Protection Agency and U.S Congress have continued to pursue bills that can be to regulate GHG emission in the future. Generally, FedEx is a heavy commercial user of gasoline and jet fuel (Smith, 2015). Thus, increased regulation concerning GHG emissions, particularly diesel engine emissions, is more likely result considerable costs at FedEx Express. Extra costs on FedEx affect ifs financial performance because it could result into increased expenses and operational costs. Nonetheless, the use of alternative fuels could improve FedEx financial performance and position.

The use of alternative fuels, the company can minimize its consumption, thus reducing overreliance on foreign sources. In addition, alternative fuels are eco-friendly, and this could enable the company to environmental laws in the U.S and other destinations. According to FedEx Annual Report (2015), fuel expenses by FedEx declined by 18% in 2015 which was as a result of lower fuel price. Continued lower prices and the long-term agreement with Red Rock to purchase over 3 million gallons of renewable jet fuel annually, could further reduce the prices, resulting to profits. Subsequently, the share price would also increase.

Economic Factors

FedEx operations are directly impacted by the economy’s state. FedEx is vulnerable to macro-economic risks because the market is highly cyclical and predisposed to patterns in economic activity (FedEx Annual Report, 2016). For instance, as FedEx continues to grow its business internationally, it gets affected by global trade growth rate, the global economy health, and the naturally volatile and developing economies of emerging markets. FedEx has operations in 220 countries and this exposes the company to foreign exchange rates fluctuations. The use of different currencies makes the company prone to exchange rate risks, which affects the ability to invest overseas. Thus, volatile markets and macroeconomic changes could significantly affect the financial position, market share, and share price. On the other hand, business seasonality affected profitability of the company. For example, in between October and November, FedEx experience low volumes, while in December, June and July, company’s Ground operations experience slowest periods (GlobalData, 2015). Subsequently, the profitability of the company could be affected.

The American Trucking Associations’ US Freight Transportation Forecast established that, “the revenue of the freight transportation industry is expected to grow by 59% and the total freight tonnage is expected to increase by 21% by 2023” (GlobalData, 2015, p. 4). Thus, FedEx has the opportunity to grow beyond 2016 financially and increase its market share because of the growing industry. Continued demand for freight transportation services in the U.S could also increase the market share of the company.

Conclusion

Based on the analysis, FedEx’s future financial prospects are successful. Factors that have influence on the financial performance, financial position and share price of the company include competition and rivalry, economic factors, technological factors, possible entrants and close substitutes, business seasonality, and foreign exchange risks. Acquisition of TNT and new aircrafts is expected to minimize cost of operations and increases revenues and market share. Technology, innovation, and ecommerce play a major role in the success of the company. Alternative fuels are expected to reduce operating costs given that FedEx in fuel intensive company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

FedEx. (2016a). FedEx acquisition history. Retrieved from http://investors.fedex.com/company-overview/Acquisition-History/default.aspx.

FedEx. (2016b). FedEx-Overview of Company. Retrieved from http://investors.fedex.com/company-overview/overview-of-company/default.aspx.

FedEx Annual Report. (2015). 2015 FedEx Annual Report A Transformative Year. Retrieved from http://s1.q4cdn.com/714383399/files/doc_financials/annual/FedEx_2015_Annual_Report.pdf

FedEx Annual Report. (2016). 2016 FedEx Annual Report. Retrieved from http://s1.q4cdn.com/714383399/files/doc_financials/annual/FedEx_2016_Annual_Report.pdf.

GlobalData. (2015). FedEx Corporation - Financial and strategic analysis review. Retrieved from http://callisto.ggsrv.com/imgsrv/FastFetch/UBER1/303009_GDTTL34954FSA.

ICRA Online. (2014). 3 reasons FedEx's Growth looks promising. Retrieved from http://www.fool.com/investing/general/2014/04/01/3-reasons-fedexs-growth-looks-promising.aspx.

Koller, T., Goedhart, M., & Wessels, D. (2011). Valuation; Measuring and managing the value of companies, US, McKinsey & Company.

Peterson, P. (2012). Analysis of financial statements. USA: Wiley Finance.

Schmidt, A. (2015). FedEx: A Global Leader in the Express Delivery Market. Retrieved from http://marketrealist.com/2015/06/fedex-college-paper-idea-turned-delivery-giant/.

Smith, F. (2015). Continuous innovation fuels FedEx success. Retrieved from http://about.van.fedex.com/blog/continuous-innovation-fuels-fedex-success/

Stevens, L. (2013). A new threat to UPS and FedEx: Networks of 'super regional' shippers handle more packages for e-Retailers. The Wall Street Journal. Retrieved form http://www.wsj.com/articles/SB10001424052702304773104579266682206635994