This is an analysis of what is, at this point, a non-story. But since others in the media have already written reams about it, we thought we'd toss our hat in.
FedEx Corp. stock soared yesterday after the Reuters news service released a letter written by activist investor William A. Ackman to other investors. In the letter, according to Reuters, Ackman said he would create a special vehicle to buy as much as a $1 billion stake in what was described as a large-capitalization U.S. company.
The company's 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 in the letter, according to Reuters.
As word of the Ackman letter went viral and media outlets jumped on it, FedEx stock immediately began to climb. It hit an intra-day high of $106.35 before closing at $103.15, up $3.65 a share on the trading day. A year ago, the stock changed hands at $89.93 a share.
Neither Ackman nor his firm, Pershing Square Capital Management LP, issued further comment. FedEx also did not comment (although we didn't call to ask for any).
CONNECTING THE DOTS
Those looking to connect the dots between Ackman's comments and the spike in FedEx stock can point, first, to yesterday's upward movement of the equity itself, a possible indication that somebody knows something others don't. It is also true that, by operating as a duopoly in the business-to-business letter and package market with rival UPS Inc., FedEx plays in a business with high entry costs and enjoys the strong pricing power that accompanies it.
Whether the business qualifies as simple and predictable, however, is in the eyes of the beholder. Also unclear is whether shippers find it costly to jump from one carrier to another; in our years of covering the business, no shipper has complained privately or publicly about being gouged when jumping from UPS to FedEx, or vice versa. In fact, most defect with the premise of spending less money, not more of it.
One thing that is known is that Ackman has recent experience dealing with transportation companies. He led the charge to revamp Canadian Pacific Railway (CP), becoming the Calgary, Alberta-based railroad's largest individual shareholder and then waging a rough proxy fight that ended in May 2012 with six board members and then-CEO Fred Green stepping down. E. Hunter Harrison, a rail legend asked by Ackman to take over as CEO, stepped in. Since that time, CP stock has risen to $122 a share from $70.
At the time of the Pershing coup, CP was in the midst of a five-year restructuring effort designed to drive down its operating ratio—a percentage of operating revenue consumed by expenses—to between 68 and 70 by 2016. As of the first quarter of 2013, CP's operating ratio stood at 75.8, a first-quarter record for the company.
LOOMING "BATTLE ROYAL"?
FedEx is in the process of its own multi-year restructuring designed to generate $1.65 billion in annual savings from cutting costs, improving efficiency, and increasing revenue by 2016. The revamp is virtually all targeted at FedEx Express, the company's traditional core air and international business and still its largest revenue-producer. The unit has been hurt by declines in domestic air demand and persistent weakness in international air services, caused by economic weakness and a proliferation of less-expensive modal options.
Ackman generally takes large equity positions in established companies whose share prices he believes have been unduly depressed due to investors' concerns over performance issues, competitive position, or general business conditions. Once his position is set, he will initially seek to hold collegial discussions with the board and management. However, Ackman has been known to take an aggressive and confrontational approach if he believes Pershing's interests are not being adequately addressed.
If the latter indeed comes to pass at FedEx, it could become a battle royal pitting Ackman, a billionaire with no reservations about agitating for change if necessary, against Frederick W. Smith, FedEx's founder and chairman, president and CEO. Smith, no shrinking violet himself, runs what could be called the most privately held, publicly traded business in America and doesn't take too kindly to perceived outsiders telling him what to do, or how to do it.
Ticket scalpers could have a field day.