By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics”
Hedge funds invest in FedEx
Daniel Loeb’s Third Point LLC disclosed in November 2013 that it initiated a position in shares of FedEx Corporation (NYSE:FDX). In addition to this, Mr. Loeb met with FedEx Corporation (NYSE:FDX) Chief Executive Officer Fred Smith. His position in FedEx amounts to approximately $270 million which represents a 0.6% holding in the company. Following the disclosure by Third Point, two other prominent hedge fund managers disclosed newly acquired stakes in FedEx: George Soros’s Soros Fund Management LLC disclosed a $174 million holding while John Paulson’s firm Paulson & Co purchased a smaller stake of $74 million. These figures represent the share values as of September 30th, 2013 while they were acquired sometime in the third quarter: between June 30th 2013 and September 30th, 2013. Volume weighted average price of FedEx stock during this period equals $107.6 per share. Based on this price, three hedge funds were probably up about 26% on their positions as of the disclosure date (November 14th, 2013). The stakes involved are relatively small for the above mentioned funds, and many wonder what the fund managers see here and what is the investment thesis that made all three of them jump into FedEx.
FedEx financials breakdown
FedEx Corporation (NYSE:FDX) is the world’s largest express transportation company. The company has a market capitalization of about $45 billion and provides delivery services to more than 220 countries and territories worldwide. FedEx currently trades at an EV/EBITDA multiple of approximately x8 (FY 2013) and x7.5 (6m FY 2014 annualized). FedEx increased its forecast of full-year earnings per share growth to 8% to 14% above last year’s results, which also reflects share repurchases made in the first half of FY 2013. FedEx also targets a $1.6 billion profit improvement in its main FedEx Express segment by the end of FY 2016. Such an improvement would value the company at an EV/EBITDA multiple of about x6. The company pays a small quarterly dividend of $0.15 per share which represents an annual yield of about 0.4%. During first half of FY 2013 FedEx repurchased 10 million shares for a total amount of $1.2 billion, at an average price of $122 per share. In October 2013 FedEx’s board of directors authorized a new share repurchase program of up to 32 million shares of common stock, which represents 10% of total shares outstanding.
Macro and micro combined
Over the last two years Daniel Loeb from Third Point LLC had been involved in an activist campaign at Yahoo! Inc. (NASDAQ:YHOO). I would speculate that the thesis for investment in FedEx was developed partially from the insights of the investments he made over the last two years. Specifically, the activist campaign at Yahoo! Inc. (NASDAQ:YHOO) which was led by him. The main part of the investment case was based on the unappreciated value and potential of a stake in Alibaba – the leading Chinese internet and ecommerce group.
He recognized the potential of Alibaba early, or maybe timely, and made an excellent investment through which one would benefit from these developments – namely Yahoo! Inc. (NASDAQ:YHOO), which owned a 40% stake at the time. Following the same line of thought one easily comes directly to the door of Amazon.com, Inc. (NASDAQ:AMZN) which is a U.S.-based e-commerce leader. And finally, somebody's got to deliver all those packages. Another approach that often characterizes his investments is the identification of a major macro or industry theme and then looking for investment target through which the growth or upside surprises will come through.
At the same time value is emphasized in order to mitigate downside risk. Examples of such investments were Yahoo! Inc. (NASDAQ:YHOO) - a play on Chinese ecommerce and Alibaba, Sony Corporation (NYSE:SNE) (TYO:6758) - a play on weakening of the Yen, and CF Industries Holdings, Inc. (NYSE:CF) - a play on extremely low natural gas prices in the United States. And speaking about macro, George Soros is well known for investments based on global macro themes. Just this year it was reported by the media that he had made more than $1 billion betting against Yen since November of 2012.
FedEx Corporation (NYSE:FDX) is well-positioned to benefit from economic recovery, globalization of the world’s trade and also gets a significant tailwind in the form of e-commerce, as internet is increasingly being used to purchase goods and services. Recent reports in the media about United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX) being overwhelmed by holiday-period demand for shipments illustrates this trend in the clearest form possible. It remains to be seen if the company will deliver on this potential.