Yesterday the rumour was that Bill Ackman, activist hedge fund manager extraordinaire, is raising money to buy a significant stake in a major American company, and that company is FedEx.
Pershing Square, Ackman’s fund, had no comment. But the stock shot up 6% anyway as some argued the company fit all of Ackman’s critera — a company that is “simple, predictable, and free-cash-flow -generative and enjoys high barriers to entry.”
He also said that it “substantially lower multiple of earnings than its most comparable competitor.”
In a note this morning, RBC analyst John Barnes said basically… ummm no, FedEx ain’t it.
He has an underperform rating on the stock — one that is sure to change if Pershing does indeed buy a stake in the company — and says that it doesn’t actually fit Ackman’s critera because it lacks high customer switching costs and significant pricing power.
From Barnes’ note:
…we believe FDX falls short on the more salient criteria, namely high customer switching costs and significant pricing power. In our view, FDX does not truly benefit from either of these advantages. We think the point regarding one principle line of business is debatable. While it’s true that the lion’s share of FDX’s revenue and earnings are derived from package delivery, the company does so through several distinct networks, which we believe would be very difficult to integrate from both an operational and cost standpoint. As a final note, we highlight that a $3B investment would give Pershing Square a 9% stake in the company at current market prices. Chairman and CEO Fred Smith has a 6.2% stake in the company, so we believe Pershing Square would likely have to fight a proxy battle in order to get management to take a new course of action. We believe such a proxy battle would be risky at this point since FDX is still in the early stages of an aggressive series of turnaround initiatives.
Proxy battle? Who has time for that? Additionally:
…this is a binary event and in the event that FDX is not the target, we believe the stock will likely sell off aggressively…FDX is struggling with a bloated Express infrastructure and cost structure, an under-utilized aircraft fleet and dealing with the trade down from air service to ground service, further exacerbating the under utilization of the Express network. Further, we believe that if an activist shareholder, whether it be Pershing Square or another one, is in fact interested in FDX, it is doing so because it believes it can seat a management team that can deliver better results quicker and more materially than management’s current cost reduction and network rationalization efforts. If FDX was performing well and trading at a multiple that is in-line or higher than its closest competitor, an activist shareholder probably wouldn’t be interested.
If that convinced you, it’s time to start looking around again. For what it’s worth, the stock is down very slightly today, about 0.08%.
Either way, we’ll all find out which stock it is by July 18th. Ackman wants investors to commit at least $1 million (of a total of $1 billion) by July 17th.
Until then let your speculations run WILD — and let us know if you have any bright ideas.
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