A Gamble Worth the Risk

FedEx (FDX  ) delivers some 1.2 billion packages a year and its operations spread across 220+ countries. That in itself is remarkable. But perhaps more mind-boggling is Frederick Smith's (founder and CEO of FedEx) gambling tale. To provide a short history, note that Smith first conceived FedEX while writing a last-minute paper at Yale in 1962. The ideas he set forth became a reality in 1971, when Smith used a $4 million inheritance and $80 million in loans/equity investments to kickstart the initiative that would become FedEx. Fast forward two years later, and Smith's company is in trouble amidst a costly markup in fuel prices. His company was on the brink of bankruptcy with millions of dollars of debt. In the darkest hour, FedEx's funds dwindled to just $5000, and Smith didn't have enough money to fuel his planes -- the bill came in at $24,000. For that week, with only $5000 cash, the story goes that pilots footed the bill with their personal credit cards and uncashed paychecks. 

Smith promptly realized this wouldn't get the job done. And herein lies the legend of his Vegas success. In light of depleting capital, Smith flew to Vegas and used FedEx's sole remaining $5000 to play blackjack. The odds were in his favor-- he came home with $27,000, giving his company another week to survive. While a $22,000 net gain was far from FedEx's end-all of saving grace, it got the company flowing toward prosperous waters. By 1976, after raising another $11 million and stabilizing the company's finances, Smith reported FedEx's first profits for $3.6 million. It was all sunshine and rainbows from there, with FedEx's profits reaching $40 million by 1980. Today, in the thick of an e-commerce boom, FedEx has pushed its revenue to $47.5 billion (FY2015). Currently, FedEx is responsible for 660 airplanes and over 90,000 vehicles. To the say the least, long gone are the days when Smith could not afford to fuel planes. 

Brief report for FY15

FedEx recently acquired TNT Express (AMS: TNTE), GENCO (GNK  ), and Bongo (private) with intent to "expand customers access to global markets and the economical option of ground delivery service". FedEx should exit FY16 with a run rate of $1.6 billion in additional operating profit -- this is on par with its profit improvement plan laid out in FY13. Furthermore, customers using FedEx Express, FedEx Ground, and FedEx Freight -- FedEx's three independently operated transportation companies-- account for about 77% of US revenue. This means that some 96% of US revenue is generated by customers using two of the three services in FedEx's ever-expanding transportation network. 

Smith credits FedEx's success to satisfying customer's primary demand -- convenience and flexibility. With tools like FedEx Delivery Manager, FedEx Pack Plus, and FedEx SameDay City, customers have the ability to re-route packages to convenient and secure locations, further accommodating the "here and now" demands of the e-commerce boom. Operationally, each of FedEx's three transportation companies are making beneficial structural changes. FedEx Express has increased base yields by reducing costs and retiring older aircrafts, while simultaneously adding 17 new Boeing 767Fs to its fleet. Meanwhile, FedEx Ground invested $1.2 billion in facilities and automation to support future growth. And lastly, FedEx Freight has continued its efforts to improve quality and increase profitability via more efficient routing and balanced volume/yield growth. 

Complimenting these structural changes are promising results on multiple fronts. In terms of reducing its environmental footprint, FedEx avoided 976,263 metric tons of greenhouse gas emissions in FY14, while also saving some $300 million by reducing its aircraft fuel-use. The success is palpable -- in FY15, shareholders were given $227 million in dividends, and more than $17 billion was spent on salaries and employee benefits. From a financial perspective, FedEx is looking bright. Cash and cash equivalents increased from $2908 (FY14, in millions) to $3,763 (FY15, in millions). Revenue increased from $45.5 billion (2014) to $47.5 billion (2015), while both diluted earnings per share ($7.05 in 2014 to $8.95 in 2015) and stock price ($144.16 in 2014 to $173.22 in 2015) incurred respectable gains.