FedEx Corporation (FDX): The TNT Bid

In the three-month period ending in March, UPS generated free cash flow of $1.4 billion. Indicating its confidence on the cash outlook, the company’s management has reauthorized the $10 billion share repurchase program.

The USPS contract

FedEx received a $10.5 billion contract with the US Postal Service to extend its domestic air transportation services for seven more years as the company’s current deal with the USPS approaches its end in September. Naturally, UPS was also eyeing the mega-contract but FedEx’s shareholders can breathe a sigh of relief. FedEx Corporation (NYSE:FDX) has attributed its symbolic victory over UPS to its “competitive” bid, which in other words likely means that the new contract has lower margins than the existing one. I don’t think the deal is particularly lucrative for FedEx, though the other option – losing the contract, or losing even 20% to 30% of it to UPS — was much worse.

In the last six months, shares of UPS have risen by 22% and have outperformed both FedEx as well as the S&P-500 ETF (SPY) which is up 18% in the corresponding period. UPS’s shares are six times more expensive than FedEx but the former still gives more than three times as much yield.

Conclusion

In essence, UPS delivered much better earnings than its rival by posting an increase in both revenues and income, despite its international operations remaining under pressure. With the USPS deal, however, FedEx has taken the spotlight from UPS.

Moreover, although UPS has appealed to the EU regulators to challenge their decision I am not expecting any developments there in the short term if at all. I say this primarily because the appeals process is a very lengthy and bureaucratic one which takes an average of two years, and UPS’ appeal can only become stronger if FedEx Corporation (NYSE:FDX) purchases some of UPS’s European assets – which would allay the fears over fair competition – which I believe is highly unlikely at the moment.

The article How FedEx Stole UPS’ Thunder originally appeared on Fool.com and is written by Sarfaraz Khan.

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