Friday, March 17, 2006

Brown v. Board of Fedex

The two companies that are and will ride the wave of globalization and e-commerce (thanks to Web2.0 this is no longer a taboo word) are Atlanta based United Parcel Service (NYSE : UPS) and Memphis based FedEx (NYSE : FDX). Fierce competitors these two firms have epitomized efficiency. We have talked about capitalizing on this trend a while ago. But given a choice between the two who wins? Here is the result of both fundamental and relative analysis

On a strict fundamental valuation basis (using ValueLine and S&P reports), FDX looks rich about 15%, however I am inclined to believe that the growth rates these two esteemed publications have put out are low, anybody who has used the
Po=FCFE/(r-g) model or its variants
knows a small tweaking of the growth rate can do wonders to your results!!!

Based on a 13% growth rate the valuation comes out to $133 for FDX, It is also looks undervalued on a P/S and EV/EBITDA basis. Having said that FDX has had a remarkable run in the few months (look at the 200 day moving average) and UPS is still a great company, especially with that 2% dividend. It's just that I think Fedex has more juice in it.
  • FDX has a small edge on UPS in China (2 extra routes)
  • FDX is recognized as a premium brand, may give it more pricing power
  • FDX is a smaller company ($32B) versus UPS' $84B - more nimble and a faster growth story
FDX also may be a great bargain today if a Private Equity firm/s decide to buy it out, the year 2006 promises to be one where the largest 1988 buyout of RJR Nabisco for $31.4B may be finally topped - why not Fedex? its an ideal candidate with a cash flow rich, unglamorous and capital intensive business. For the more conservative types there's always UPS.

Sunday, March 05, 2006

ETF Innovation

Lately innovation has been associated with technology, especially the web2.0 phenomenon. However innovation can be found in the most staid and unlikely places take Exchange Traded Funds (ETF's) for example. ETF's are an asset class I have often blogged about, are essentially index funds that trade like shares. They are a great way to play sector bets and I have been especially impressed by the country and geography ETF's as a way of international diversification. They are liquid and have low fees. Although ETF's have assets of $313 Billion, this number still dwarfs the $9.2 trillion of assets in mutual funds. (source : WSJ)

The ETF business is booming though, there are a handful of players
However the company that deserves the "Oscar" for bringing some life to this class of assets is undoubtedly "PowerShares Capital Management". PowerShares recently was snapped up by London based Amvescap (NYSE : AVZ) ($18.42) for $230M.

PowerShares burst on the ETF stage in late 2004 . They currently offer more than 35 ETF with $3.5 B under assets, some of the most esoteric and exotic ETF's are.

PowerShares Nanotechnology portfolio
PowerShares Water Resources portfolio
PowerShares Clean Energy portfolio
PowerShares Valueline timeliness portfolio
PowerShares MicroCap portfolio portfolio

Each of these offer never before available options to investors, this was true innovation and is bound to do well for its new owners. Amvescap looks richly valued at a P/S of 2.58, On a discounted free cash flow to equity basis, using growth rates seen in the industry the share price should be approximately $14, currently trades at $18.42

However the ETF industry looks to be growing especially with the industry now having approached the SEC for launching actively managed ETF's. I believe that PowerShares will continue its innovation and be a tremendous growth engine for Amvescap (NYSE : AVZ) ($18.42) (justifying a higher growth rate).

Amvescap will bring rich rewards to its investors, I believe in a few years Amvescap will itself be acquired most likely suitor the Boston giant Fidelity, who has been AWOL from this scene.
So the best way to play the ETF game buy the most innovative company in the business!!