Tim McAleenan sobre FEDEX: (26.05.2019)
I am finishing my reading of the book “Changing How The World Does Business: FedEx’s Incredible Journey to Success - The Inside Story” that chronicles how FedEx rose to the top of the courier delivery market under the hand of its founder Fred Smith who had turned a $4 million inheritance (along with a $91 raise in venture capital) into a business that has been one of the best publicly traded stocks that the investor community has ever encountered in the past half century.
Specifically, FedEx traded at a little over $1.07 per share (adjusted for splits) in 1979 and now, counting dividends, has created more than $257 in value for each $1.47 share purchased in 1979. The increase has been a rise in value of 23,918% over the past forty years, for an annual compounding rate of 14.69% over the past four decades.
When I studied FedEx’s record, I wanted to analyze the obvious question: What has this company gotten right to elevate to the status of a super-compounder in the investing world?
The first thing I noticed is that FedEx’s origins related to solving a problem that was very important to customers–super fast delivery. In 1978, a year before its IPO, it rolled out the slogan: “When It Absolutely, Positively Has To Be There Overnight.” It may have been clunky, but my gosh, the point of the business was clear. If you needed something shipped quickly, FedEx was the company for you.
That came with two important implications. First, the company was creating a brand for itself in an area where it is difficult to differentiate itself. Aren’t all package delivery services the same? The temptation could have been to try and compete on price, dooming itself for perpetually low margins. Instead, it created a brand name that meant speedy delivery, giving it a clear market niche for business customers as well as individuals that needed a document overnight.
There is an old business saying: “The greater the problem, the greater the compensation for fixing the problem.” If someone’s “problem” is that they need to get package from Location A to Location B within two weeks, well, the compensation is not going to be great because there is no particular time limitation that makes the problem great. But if you need to get to Location B within 12 hours, you now have a problem that you are willing to pay much more to solve.
By rolling out distribution networks across 25 cities in the 1970s, FedEx was able to charge premium pricing for fast delivery. This meant higher retained profits that could be used to roll out even more locations and deliver faster and faster, increasing delivery speeds in locations beyond America’s largest cities and into America’s secondary cities (population-wise) where the same strategy could be re-executed.
Next, FedEx actually cared about customer satisfaction. Who is the person or entity most likely to need overnight shipping? The answer: The person or entity who recently used your service for overnight shipping.
Fred Smith measured the right things, having FedEx focused on the value of a customer’s loyalty score over the course of a lifetime. With prime business customers, a loyal relationship could mean $15,000 per year in revenues for 18 years as an expected life. If that customer was dissatisfied over a transaction, FedEx management wasn’t trained to see it as $280 walking out the door, but rather, $280,000 walking out the door. When you think about what a recurring customer represents over the course of decades, rather than the specific transaction in front of you, you will treat them better and further “build the brand” because it actually stands for value.
When FedEx polled its business customers in order to learn what was disappointing its customers, it learned that business customers wanted to know exactly where its packages were located throughout the shipment process. Although FedEx wasn’t the first to roll out shipment tracking technology, it was the first company to use it as a standard feature that it is now common in the courier industry.
You know what else is worth paying attention to? People always act like they missed the boat with these investments. They think, “Yeah, it’s nice that this incredible growth happened forty years ago; that doesn’t do me any good today.” Guess what? I could have easily written this article a decade ago, and the factual analysis hasn’t changed. Over the past ten years, FedEx has continued to deliver goods faster and faster while still charging a premium price to do so.
The earnings per share were $3.76 in 2009. Today, they are $15.45 per share. The profits per share are rolling forward, year after year, as FedEx continues to invest $4 billion per year in distribution facilities so it can get packages to customers faster, faster, faster. The premise for what made FedEx an incredible business has not changed. And now the stock trades at 10x earnings. Technically, this is the lowest valuation for the stock on a P/E ratio basis in the past twenty years, including the Great Recession.
And the business is growing at 8.5% and paying out a 1.6% dividend. In other words, earnings per share and dividends will give investors 10% returns, plus there is a fair chance of P/E ratio expansion to 15x earnings, which suggests a reasonable possibility of 12-14% returns over the coming ten years.
Just last year, the investor community was willing to pay $274 per share for the stock. They were willing to value the business at 18x earnings, which was in line with its historical rate. Now, earnings per share growth falls to the mid-single digit rate, and suddenly, the stock goes on sale.
It would cost a competitor $100 billion to roll out infrastructure that could compete with FedEx, and even then, it would co-exist with FedEx rather than wipe it out because logistics is not a winner-take-all business.
I think FedEx at 10x earnings is one of the quietest deals available among mega-caps today. The profits are growing at a high single digit rate, the P/E is as low as it has ever been in the past twenty years by at least 25%, and the company is rolling out new distribution facilities. It is executing the same strategy that has delivered 14% annual returns over the past forty years, and hardly anyone has noticed. It is quintessential “great company at a moderate price” territory that is responsible for nearly all of the super-compounding that investors are able to receive from a single investment decision over time.