The U.S. benchmark index Dow Jones registered 40% returns in the last two years, but three major airfreight companies underperformed the market standard during the same duration. However, there are promising growth prospects for these companies, since they are expanding in developing countries, e-commerce, and technological advancements. Let's analyze these companies to find investment opportunities for the investors.
Bigger, the better
FedEx (FDX) has partnered with around 9,000 small business units across the U.S. and Canada for delivering shipments, and it generated revenue of around $10 billion under its FedEx ground segment in the last fiscal year. The company will expand this model to other states in the U.S. and Canada by the end of 2014, as its services are quick and reliable. FedEx delivers 61% of packages in two days or less, due to its efficiently managed facilities. The company has advanced automated systems that can sort 7,500 packages per hour. Moreover, it has 31 sorting facilities in the U.S. and Canada to manage its operations in this region. By increasing its footprint and employing latest technology, FedEx will be able to grow its FedEx ground segment revenue by around 8% in this fiscal.
FedEx generated around $8.8 billion last year from its international priority package shipments under its FedEx express segment. The company has a wide reach; it caters to around 220 countries with its strong distribution network and advanced technology. In the last decade, Asian countries emerged as growing contributors in global trade due to increased exports and imports from emerging countries like China, India, and South Korea. To tap this growth, the company is planning to launch a new sorting facility in Japan by 2014 as it has smoother connectivity between Asia and American continents. Furthermore, to monetize the volume growth and maximize the capacity utilization, the company is planning to buy multiple Boeing's 777F in line with what it bought in 2010. FedEx is hoping to have around 22 of these planes in service by next year, and will add 16 more by 2020. The 777F has more space and capacity to carry more goods at a time. FedEx can use this capacity efficiently reach customers with ease. These cargo planes travel around 6,600 miles in one flight, enabling customers to send parcels from the U.S. to Asia, or vise-a-versa, in a single day. We assume bigger cargo planes will help it capitalize on growth opportunities in Asia with the additional capacity. Considering these factors, we believe FedEx will able to generate higher revenue from its international priority segment in the coming years.
Banking on Asia and e-commerce market
Package volume is expected to grow in the U.S. as a result of economic recovery in past few quarters and increased consumer spending. United Parcel Services (UPS) generated around $23 billion in the last year from its domestic ground operations in the U.S., and this revenue is expected to rise further due to the increasing U.S. e-commerce market. The U.S. e-commerce market was $225 billion last year and is expected to grow around 12% this year. Also, the North American e-commerce market is expected to surge from $373 billion last year to $420 billion this year. UPS has focused service like "Surepost", which caters to the growing e-commerce market with ease. With the help of this service, shippers and receivers can track orders online, and it is more reliable and consistent than any other service available on the market. This service is ideal for the business to customer, or B2C, market where this kind of smoothness is essential. We assume that UPS will benefit from the surging e-commerce market with its unique services.
In the second quarter result of 2013, UPS revenue grew by 1.2% year over year to $13.5 billion, and it posted an increase of 5% in the international daily package volume. The company is leveraging its market position in Asia with the launch of a new direct flight from Zhengzhou, China to South Korea last year. Zhengzou is a major hub for exports in China, and it exports to Europe and the U.S. Goods exported from Zhengzou will reach in the U.S. via the air route to South Korea, which has smooth connectivity. China's government is also promoting Zhengzou to increase trade and is taking developmental initiatives. The government approved the Central Plains Economic Zone last year for this city, which will increase the logistics and infrastructural development. With this, UPS also launched new express freight services in China to cater customers that have urgent, time sensitive delivery requirements. By leveraging its market position in this country, we assume that UPS will able to increase its volume, which will result in higher revenue.
Growing import and exports
Expeditors International (EXPD) is a leading global player in logistics and offers solutions in shipments and logistical support to various businesses. The company's revenue improved 10% from $83.96 million last year to $92.32 million this year. The company's revenue in airfreight segment marginally increased 0.7%, while revenue of ocean freight and services dropped 5.2% in the same period. We feel Expeditors' revenue will rise further in the second half of this fiscal year due to a flurry of new technological product launches. Many silicon-valley companies will roll out new products in the second of this fiscal year, and there will be a rise of demand of these consumer goods. It is expected that launch of Apple's new iPhone, Sony's PlayStation, and various other technological products will increase U.S. exports this year. In June 2013, this region registered export growth of around 5.6% year over year, so it is already showing an inclining trend. We believe that the rise in exports of these consumer goods and dominant market positions of Expeditors will help its revenue continue to grow since it caters to these customers through its different channels.
A rise in consumer spending is a sign of improving economy, and the U.S. is currently experiencing this recovery. With these developments and an increasing consumer confidence index, import of goods through containers is expected to rise by 4.2% in the second half of the current fiscal year, which was estimated at 2% previously. Moreover, the entire trade lane is expected to experience growth due to increasing consumer demand. Trade lane refers to the logistical network by which goods are sent and received. With the increase in U.S. imports, Expeditors will have more goods to transport, which will increase the company's volume. Expeditors' volume declined in the first half of this fiscal year, but we expect that the trends will reverse this in the second half. We base our expectation on the optimism over U.S. imports since Expeditors has the capacity to transport through water and air with expertise. Therefore, Expeditors' EPS is also expected to increase by 13.36% in the next year.
FedEx has a PE of 21.78, which is lower than PE of both UPS and Expeditors. UPS and Expeditors stand at a PE of 99.51 and 24.58 respectively. Looking at this, we assume FedEx will outperform its competitors. However, UPS and Expeditors' fundamentals are strong, which will move their stocks upward. All three companies have an expected EPS growth rate of above 11% for the next fiscal year, which should give investors' confidence in regards to the growth of these stocks. Considering these factors, we recommend a "buy" for all three stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.