Fedex and Amazon are in the middle of an ugly spot. Anyone paying attention over the last few years will be aware of the “frenemy” relationship between Amazon and logistics providers, as the company offers a lot of business but hammers margins and is stealing away business with its own shipping network. Well, Fedex finally said enough is enough and decided against renewing its ground shipping contract with Amazon. Therein lies opportunity, however, as it should offer UPS a lot more business.
FINSUM: This is a bold move by Fedex. We expect it will hit revenue slightly, but probably not wound profits too badly. It could give UPS and USPS a boost.
The topic of the next recession has faded a bit from the mainstream media discussion over the last month, and understandably so. Not only has the market jumped, but the Fed seems to have completely backed off the rates gas pedal. That said, we are keeping an eye on primary and secondary data on the economy to see what the future may hold. Here is some data that is worrying us a bit: global freight shipping rates are tumbling. China’s weak spending and a global slowing of growth has sent shipping rates way down, a sign of excess supply and demand weakness across the world.
FINSUM: This kind of info, along with metals demand etc, are great leading indicators of what might happen in the economy. Add this to the warning signs.
A 7% yield admittedly sounds attractive. However, what if it comes from a shipping company, and at the beginning of a trade war no less? That must be crazy. Think again, says Barron’s. The company is Triton International, which is the largest shipping container lessor in the world, owning 3.5m containers. It is a highly experienced operator and has 26% market share. However, worries over a trade war have hammered the stock, which is down 18% this year and trading at just over 7x earnings. Fears of how a trade war might affect its business look overblown and a fair market valuation for the company seems about 40% higher.
FINSUM: So this is a bet that the market will reevaluate the stock’s business model and see it is not that vulnerable. Sounds like a risky bet to us, but a 7% yield is nice cushion.
There is a lot of hype about disruption in the shipping business right now. Many investors fear that Amazon will start a major delivery network, and/or come to deal with a smaller company that undercuts the profits margins of UPS and FedEx. But make no mistake, that is going to be very difficult to do because of the nature of the delivery business itself. Residential deliveries, especially the “last mile”, are very capital intensive and require major installed bases of infrastructure for fulfillment. This means any loss-leading pricing will likely prove short-lived.
FINSUM: The big old players have a strong grip on the market. Only Amazon has the clout and capital to unseat them, but it would take several years of major capital commitment to do so, and it doesn’t seem to make enough sense to undertake that.