Analysts support FedEx Corp.’s decision not to renew its Express U.S. domestic contract with Amazon.com Inc., saying it will benefit the delivery service company in the long run even if it causes a near-term squeeze.
“FedEx’s decision to no longer provide FedEx Express U.S. domestic services for Amazon.com makes perfect sense given expectations of strong e-commerce growth across the retail sector,” says Jonathan Root, Moody’s senior vice president and lead FedEx analyst.
Moody’s estimates that Amazon’s value to FedEx is about $850 million in revenue, with a daily volume of about 200,000 packages out of 2.9 million, “if the entirety of Amazon’s business was in the Express segment.”
FedEx is adding Sunday service to its residential delivery at the beginning of January 2020, which should continue to keep it competitive.
“FedEx will achieve higher margins and better returns on its investments in its Express network by re-deploying capacity to customers other than Amazon. We believe Amazon, representing less than 1.3% of FedEx’s nearly $70 billion of consolidated annual revenue, is one of FedEx’ least profitable customers on a margin basis and that the decision implies that Amazon would not agree to financial terms that would meet FedEx’ needs.”
FedEx FDX, +2.42% said in a statement posted on its website Friday that it has made the decision in order to focus on the “broader e-commerce market.”
The decision doesn’t impact other Amazon AMZN, +3.14% contracts, like those for ground delivery and those with other FedEx business units or international service.
Amazon recently announced that it would cut its free delivery time for Prime members from two days to one. Amazon has relationships with other carriers and is devising its own methods for delivering goods, such as drones and encouraging workers to start their own delivery businesses.
“We respect FedEx’s decision and thank them for their role serving Amazon customers over the years,” read a statement from an Amazon spokesperson sent to MarketWatch.
Amazon stock is up nearly 3% in Monday trading.
According to FedEx, the Amazon business only accounted for 1.3% of FedEx’s total revenue for the year ending Dec. 31, 2018, and it has a “network and capacity to serve thousands of retailers in the e-commerce space.” With growth in e-commerce, daily package delivery is set to grow from 50 million today to 100 million in the U.S. by 2026.
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UBS analysts estimate the value of the Amazon U.S. domestic business at $700 million, and say they think this move “makes sense for FedEx in the medium term.” But “it will likely take time to fill this capacity and air line-haul capacity is not easy to adjust.”
FedEx competitor United Parcel Service Inc. UPS, +1.89% could benefit from this decision.
“While Amazon could potentially handle some business with their own leased air line-haul, we believe most the packages would need to move on UBS or Amazon could simply offer slower delivery on these pieces,” the note said. “We view the move by FedEx as a positive for UPS and for pricing.”
In the near-term, FedEx could feel the pinch.
“Fiscal 2020 is shaping up to be a difficult year for FedEx and we believe walking away from the Amazon business could make it even worse,” UBS said.
UBS rates FedEx shares sell with a $136 price target.
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Competition among retailers to provide quick, convenient delivery was also raised another level on Friday with an announcement from Walmart Inc. WMT, +1.38% that it will make deliveries into customers’ homes.
FedEx stock is up 2.3% in Monday trading, and up 0.2% for the year to date. Amazon stock is up 24.2% for 2019 so far. And the S&P 500 index SPX, +0.47% has gained 15.5% for the year to date.
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