FedEx Hits Truckers While They're Down

Yesterday morning FedEx (FDX) announced a 25% reduction in fuel surcharges on its less-than-truckload (LTL) and freight services. Clearly FedEx sees this as a great opportunity to use their growing international business to grab market share by taking advantage of a weak domestic trucking market to further squeeze their competition, including Arkansas Best (ABFS), Conway (CNW), and Yellow Roadway (YRCW). With many truckers continuing to see year-over-year volume reductions, price reductions kick out another leg of the profitability stool for these companies. On many first quarter earnings calls, the saving grace for LTL truckload providers was a stable price environment despite reduced volumes. Managements trumpeted how consolidation in the LTL industry has made pricing more rational among competitors and profitability should therefore remain stable. To make matters worse for investors in these truckers, they are still trading at premium P/E multiples (while the denominator - earnings - are at risk).

As discussed in my April 27th post, one of the keys in my investment process is to invest in industries with the wind behind their back and truckers have the wind squarely in their face. For industries with the wind in their face, while the primary risk is the expected bad results, the really important secondary risk  is the unexpected even worse developments -- such as increased competition or further fundamental deterioration.

My managed account clients and I are short Arkansas Best Corp.