Review of FedEx analyst day showcasing the company’s current technology

A technology display and discussion. Earlier this week FDX hosted an analyst meeting to showcase its current
technology and the direction it is heading. Management referred throughout the presentations to its culture of
technology and change, which stems from Chairman & CEO Fred Smith. FDX demonstrated e-commerce,
wireless, voice data and supply chain technology capabilities.
• Part technology company. FDX currently employs about 6,600 IT professionals and expects this number to
remain fairly flat for the foreseeable future. It has four primary data centers and sixteen other smaller centers, 7000
WiFi “hot spots” (including 1,000 Kinko outlets) and receives three million track and tracing requests per day.
• Leveraging its technology core. Annually FDX expenses and capitalizes roughly $1 bill. (net of $300M
depreciation) and $250M in IT costs, down from about $1.2 bill. and $400M three years ago. FDX believes its core
IT infrastructure, like its plane network, is built and that it will be able to grow its revenue base materially without
raising its IT spending for some time.
• Nexus between physical and virtual. Fred Smith discussed FDX’ goal to provide customers with a nexus between
the physical movement of goods and the technology required to power commerce. He highlighted FedEx Ground’s
and Kinko’s industry leading technology as a leading reason why FDX purchased each of them. Future acquisitions
are likely to also focus on leading technology.
• FDX remains outperform rated. Our $88 year end C04 target price is based on an 18x-19x forward P/E out six
months from now on our then forward C05 EPS estimate. Our sense remains that each of its businesses lines is
benefiting from the economy and recent productivity enhancements which should lead to continued above market
growth with smoother earnings and cash flow.
INVESTMENT CONCLUSION: As always at FDX analyst meetings, we were impressed with the depth of
management on display at their technology summit. CIO, Rob Carter did an excellent job of breaking down FDX’ many
market leading technologies into understandable process enhancers for FDX’ various business lines. We believe Chairman and CEO, Fred Smith’s commitment to technology and aggressively staying ahead of his competitors with
technology came through during the meetings as did the notion that FDX is in a strong position financially to leverage its
technology core going forward. For instance if we assume FDX grows its revenue 10% a year the next two years in
addition to acquired Kinko’s revenue but maintains its total annual expensed and depreciated IT expense of about $1.3
billion during that period it implies IT expensed costs as a percent of revenue will improve by about 90bp on an annual
basis. This 90bp of potential overall corporate margin improvement for FDX equates to about $0.55/share of
potential EPS improvement during F06.
In addition we believe FDX will increasingly see productivity enhancements from its increased wireless capabilities
across business lines, as well as enhanced and new technologies such as Radio Frequency Technology (RFID). Currently
FDX utilizes RFID chips to track its trucks into and out of its terminals. It has also recently began a small scale test in its
Ground package division utilizing RFID chips to replace barcodes for packages being checked into facilities. Over time
we suspect RFID chips on boxes will replace the average 10-16 bar code swipes a package undergoes within the FDX
network. These bar code swipes are necessary to update where the package is in the network for customers looking for
track and trace visibility, which is almost real time. We believe that over time, once protocols and technology bugs are
worked out, RFID technology will potentially allow for real time package status checks with lower labor costs and
increased productivity benefits as potentially one day RFID chips could eliminate the need for of all or the majority of
hand held swipes currently utilized in the process.
George Colony, the Chairman and CEO of Forrester Research gave an independent presentation (reportedly he refused to
give FDX management an advance look at its slides) and noted that CEO Fred Smith and FDX’ as a corporation rank at
the very top of corporate CEOs and corporations which are the most committed to new technology and at utilizing
technology intelligently for competitive reasons. He also noted that FDX’ chief competitor, UPS, also has market leading
technology making them two of the best technology players in any sector one can find. He described FDX and UPS as
being tied in technology with each taking the lead from time to time in different areas. Deutsche Post was noted as
substantially behind FDX and UPS in IT capabilities. This seems to us as a fair presentation as both FDX and UPS have
exceptional technology capabilities and we think it is very difficult for customers to rank one above the other overall. We
do note however that UPS historically has taken a much more conservative approach towards technology. FDX looks to
be more of a pioneer in IT historically compared to UPS which is happy not to be an early adopter but rather to spend on
more tried and true applications.
We continue to believe that FDX management has done an excellent job of changing their focus on the company from
growth at all costs to profitability and cash flow first, followed by profitable growth. This culture seems clear in the way
it is currently spending on technology and how it is planning to leverage that spend going forward. Our sense remains
that as investors become more convinced that FDX’ earnings and cash flow are smoother and more consistent than in
prior economic cycles it will continue to receive a modestly above market valuation even during a stronger economy and
tightening interest rate cycle. That is over the long term, we expect investors to increasingly view FDX as a company with
above overall market growth capabilities with modestly less cyclicality than the overall market. FDX remains rated
Outperform.