Internet Delivers for FedEx’s Parent

Shares of FedEx parent FDX Corp. have soared in recent months, in good part because many investors now view the express-delivery leader as a big beneficiary of the exploding growth of Internet commerce.

But is it?

Certainly all the goods now being ordered online mean more shipments for FedEx and its rivals. FDX, in fact, cited “the growth in electronic commerce” Thursday for helping its fiscal third-quarter earnings jump 34% from a year earlier (excluding one-time charges), a gain that far exceeded Wall Street forecasts.

The higher profit, along with FDX’s announcement of a 2-for-1 stock split in early May, also sent FDX’s stock surging yet again Thursday. The stock jumped $5.19 a share, to close at a record $98.13 on the New York Stock Exchange.

But some analysts contend that the degree of Internet excitement surrounding FDX is based more on emotion than truth, and that investors have pushed up FDX’s price in excess of what its electronic-commerce operations are really worth.

“It is still very unclear what is ‘Internet’ at FDX and how much it brings to the bottom line,” analyst Jeffrey Kauffman of Merrill Lynch & Co. warned clients recently.

Another analyst, Edward Wolfe of BT Alex. Brown Inc. in New York, agreed that “FDX [stock] seems to continue to rise despite [operating] fundamentals that would indicate otherwise.” FDX, he said in a recent bulletin, is “not yet FDX.com.”

But FDX said the Internet and FedEx’s own global computer-information network are indeed the key components of its growth strategy. As those networks help other companies expand their sales, that means more shipments for FedEx.

“Their growth will drive ours,” said FDX spokesman Bill Margaritis.

And investors are ignoring the naysayers. FDX’s stock--after being pummeled much of last year when its earnings suffered from the Asian economic crisis--has more than doubled in price since Sept. 30.

FedEx, of course, is the premier provider of express-delivery services, mainly for businesses shipping correspondence, parcels and manufactured goods. Originally named Federal Express, the Memphis, Tenn.-based concern now uses 145,000 employees, more than 600 aircraft and 42,500 vehicles to move an average of 3.1 million packages each day.

(FedEx, incidentally, just opened an employee-recruitment center in El Segundo, its largest such office outside of its Tennessee headquarters. The company says Southern California is one of its fastest-growing employment markets.)

Its parent, FDX, was formed a year ago when FedEx bought Caliber System Inc., a provider of ground-delivery services through its RPS division--which competes for non-express shipments with industry leader United Parcel Service of America Inc. Caliber also owns Viking Freight, a West Coast trucking company, and overall FDX’s annual revenue totals $16 billion.

To be sure, other developments have fueled the jump in FDX’s stock price. The company’s earnings continue to grow despite the overseas problems, which are starting to ebb. The company’s pilots, after threatening a strike over the Christmas holidays, agreed to a new contract. And FedEx announced a 2.8% average price hike for U.S. shipments starting this month “that appears to be sticking,” said analyst James Parker of securities firm Robinson-Humphrey Co. in Atlanta.

Fuel prices also remain low, which is why several of FedEx’s rivals also have seen their stocks rally, including Airborne Freight Corp., whose shares have nearly doubled in price since Sept. 30.

Even so, the Internet has sparked much of the recent action in FDX’s stock. Published reports have stoked the fire by suggesting that FedEx will be a prime transporter of products ordered online, and therefore FDX’s stock is a way to exploit the e-commerce frenzy that has sent so many other Internet-related stocks soaring to dizzying heights.

Yet FedEx is the first to note that it doesn’t benefit much from the surge of people ordering books, compact discs, clothing and other items online. That business, which doesn’t emphasize overnight delivery, is mainly the purview of UPS and the U.S. Postal Service.

Rather, FedEx’s Internet activity mainly involves business-to-business shipments arranged over the Internet, which by itself is a major market. And to hear FedEx tell it, that description only begins to describe the enormous potential in Internet-related commerce for the company.

FedEx is already a leading information technology company, with a computerized network and popular Web site that are used not only for keeping track of shipments, but to help manufacturers, retailers and other corporations operate high-tech systems for handling their production, inventory control, billing, marketing and distribution.

Moreover, FedEx is striving to get more customer shipments by helping them design and coordinate all those facets. For instance, it helps manufacturers such as Dell Computer Corp. move raw materials to parts assembly plants, then move the parts to plants doing final assembly of finished products, then move the finished goods to the customer.

That helps manufacturers shave costs by keeping their inventories lean and helps generate more deliveries for FedEx.

“We can help them do everything, from helping make the product to arranging its shipment, printing the label on its box and then tracking its distribution and even its return policy,” said FDX’s Margaritis. And it doesn’t hurt that FedEx already has landing rights in more than 200 foreign countries.

“We sell solutions,” he said, “and that helps us move more boxes.”

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Flying High

FedEx’s role in e-commerce is a key reason the stock price of FedEx’s parent, FDX Corp., has soared. But some analysts say the FedEx-Internet connection is overblown. Monthly closes and latest on the NYSE:

Thursday: $98.13, up $5.19

Source: Bloomberg News