Ackman Might Be Wasting Time on FedEx Activist Investor Efforts

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FedEx Corp. (NYSE: FDX) may soon have a new friend and foe alike. Market rumors have been out on Tuesday that activist investor Bill Ackman may be taking a large stake in FedEx. The reports surfaced on investor letters whereby Ackman’s Pershing Square is looking for $1 billion to go after the next investment idea: a large-cap public stock, with one primary operating business, with significant barriers to entry, and with its stock trading at a significant discount to its primary competitor. Ackman is also reportedly planning to actively engage the company’s management and board of directors. FedEx fits the description, but the problem is that Bill Ackman may simply be wasting his time and the money of his investors in this particular case.

FedEx is apparently that stock, and it is significantly cheaper as a stock than rival United Parcel Services Inc. (NYSE: UPS). This is a situation where an activist investor may have just created a front-running trade that went against himself. Ackman’s letter is requesting financial commitments by July 17, which gives the rumor-mongering and front-running investors more than a week to get in ahead of Ackman.

Here are some of the comparable figures for FedEx versus UPS, but after the move in the stock prices of each. The figures are based upon the current fiscal year forward P/E ratios, the price-to-sales ratio based upon current year sales estimates, the Return on Equity (from FinViz), the dividend yield, the market capitalization, a price-to-book ratio, and a price-to-book ratio based upon tangible assets. This is shown as follows:

FDX vs UPS

What we would expect is as follows: Ackman would likely push for a break-up of the FedEx Kinko’s center “to unlock value” (even if it doesn’t). We would also expect for Ackman to encourage FedEx to leverage up its balance sheet with debt, which would allow for it to pay a much larger dividend and to aggressively buy back stock. We would also expect that Mr. Ackman would somehow press the company to try to steal away at least part of the Amazon.com lock that UPS has over a shipping contract. And it would seem simple enough that Ackman would probably try to press FedEx into streamlining how the company buys or leases planes, as well as how it handles its delivery routes on a local level. Ackman might even press for the founder to split the chairman and CEO role, or for other “restructuring” efforts.

If you want to know why we care so much, FedEx was one of the five companies we specifically targeted to double its dividend. Because management is so strong here, outside pressure may be immaterial.

The real question is whether or not Bill Ackman can really make any change here. FedEx has a strong Founder named Fred Smith running the company as Chairman and CEO, likely for at least a couple or few more years ahead of the 72-year old mandatory board retirement age. Smith has built this company along with a solid team, and he is well respected by employees and by the public. Smith could probably get away with trying to hire Carl Icahn as the anti-activist any time he hears an “Ackman Whine.” Smith could also probably get away with publicly telling Ackman to go beat feet and that he has no intention of ever listening to him.

Here is a list of FedEx’s corporate governance guidelines. The company does permit any holders to direct questions through the Corporate Secretary’s office. FedEx shares closed up 4.3% at $103.15 against a 52-week range of $83.92 to $109.66. UPS shares closed up 1.5% at $89.73 against a 52-week trading range of $69.56 to $91.04.

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