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A shipping titan improves its competitive position

Keith Schoonmaker, CFA

Shipping pioneer FedEx continues to refine its portfolio to increase margins and capture more of its clients' shipping spending. Well known for overnight parcel deliveries, FedEx has improved its competitive advantage by building the capacity to handle additional modes of shipping. Fulfilling more of its customers' needs makes FedEx more difficult to displace and a bigger, stickier part of clients' operations.

Despite the shipping industry's significant and costly barriers to entry, we limit FedEx's economic moat rating to narrow rather than wide. This is because we expect the firm to outearn its cost of capital by only a slim margin, and this tempers our confidence that the firm reliably will exceed its cost of capital two decades from now.

We do, however, think the shipper is improving its competitive position, and award it a positive moat trend. One of the big drivers of this is the improvement of the firm's ground operations in the U.S. FedEx now boasts greater speed than its competitors in many lanes, and that is helping them attract more volume. In short, FedEx's network effect is strengthening. This is evident in the ground segment's growth, improved margins and market share gains.

Fed Ex's shares are fairly valued at this time. We would suggest investors wait for a pullback before investing in the shipper.