FedEx Rises on Speculation Bill Ackman May Acquire Stake
FedEx Corp., the biggest cargo airline, rose the most in nine months on speculation that it may be an investment target for William Ackman’s Pershing Square Capital Management LP.
The stock increased 4.4 percent to $103.15 at the close in New York trading for the largest one-day gain since Oct. 10. More than 11 million shares were traded, greater than six times the daily average volume over the past three months.
Attention focused on FedEx after Ackman outlined in a letter to investors his intention to buy a stake of as much as $1 billion in a large-capitalization, investment-grade U.S. company he didn’t identify. FedEx, with a market value of about $33 billion, is in the midst of a cost-cutting restructuring at FedEx Express, its largest unit.
“This is purely momentum driven by a rumor that an active investor is knocking on the door,” said Logan Purk, a St. Louis-based Edward Jones analyst who recommends buying FedEx. “Whether this is a situation where it gives most of it back tomorrow, who knows. It is pure speculation at this point.”
Ackman declined to comment in an e-mail. Jess Bunn, a spokesman for Memphis, Tennessee-based FedEx, also declined to comment.
“The business is simple, predictable, and free-cash-flow-generative, and enjoys high barriers to entry, high customer switching costs and substantial pricing power,” Ackman told investors.
FedEx meets almost all of Ackman’s criteria, has had an anemic stock performance over the past six years and falls short of UPS on returns to investors, Keith B. Papa, of institutional equity sales at Bank of America Merrill Lynch, said in a report yesterday. Before today, FedEx had dropped 11 percent over the past six years, while United Parcel Service Inc. jumped 20 percent.
Ackman is familiar with transportation and taking on entrenched management through his experience with Canadian Pacific Railway Ltd., Papa said. Ackman helped oust the chairman, chief executive officer and four directors after Pershing became the railroad’s largest investor in 2011.
At least two analysts said Ackman’s characteristics don’t all fit FedEx.
“It’s not a simple business, it’s not predictable and it’s not free cash flow,” said David Campbell at Thompson Davis & Co., who recommends buying FedEx. “They can’t raise prices too much or they lose business. I don’t think you can really call that substantial pricing power.”
Customers often use both FedEx and UPS, the world’s biggest shipping company. While large customers might have to make some effort to separate their supply chain links to a single shipper, “it wouldn’t be that expensive from a financial aspect” to switch to another shipper, said Kevin Sterling, a BB&T Capital Markets analyst.
“They meet some of the criteria to a T, and some other criteria to a lesser extent,” he said of FedEx.
Based on analysts’ estimates for profit this year, FedEx has a price-earnings ratio of 15, about a 17 percent discount to UPS (UPS)’s ratio of 18, data compiled by Bloomberg show. Its long-term debt is rated BBB (FDX) by Standard & Poor’s, the next-to-last level of investment grade, with a stable outlook.
“FedEx is really solid operationally,” said Mark Mulholland, manager of the $595 million Matthew 25 Fund Inc. (MXXVX), which owns shares of the shipping company. “It’s a great company, not highly leveraged, very cheap and there’s a very easy valuation comparison. It’s a great company at a good stock valuation.”
Ackman could push FedEx to buy back shares to boost its value, he said.
An increase in dividend could also unlock additional value, said Troy Patton, president of Archer Investment Corp., which has $100 million under investment, including FedEx stock.
FedEx is parking older planes sooner and cutting capacity to Asia to help trim $1.7 billion in costs and sustain profit growth. The restructuring was prompted by customers switching from the most expensive international shipments to cheaper options. About 3,600 workers also are leaving the company under a voluntary buyout program.
Ackman’s investment in J.C. Penney Co. and a wager against Herbalife Ltd. have lost money or produced small profits. The last fund Ackman raised for a single-stock investment, a $2 billion vehicle that invested in Target Corp. in 2007, lost 90 percent of its value over the next two years. He exited the Target stake in 2011.
The activist fund outlined in Ackman’s letter will be capped at $1 billion and will invest alongside the New York-based firm’s main hedge funds, which plan to put about 15 percent of their capital in the same stock.