FedEx (FDX) Earnings Show How AI is Transforming Industrial Sector

0:00I'd now like to welcome in Ed Batowski, managing partner of chat with investments and Christopher Davis, partner Hudson value partners. And so Ed, we'll start with you here. Reno FedEx delivered a strong third quarter with meaningful to a double beat on both its earnings and its revenue. So what were really in your opinion, the biggest drivers behind this out performance? Well, there are efficiencies. They've been working on developing a lot of efficiencies, just like UPS has. But I'll tell you, the one one thing that's out there that no one's talking about is the hedging strategies. They must be implementing right now on oil or in terms of fuel, because that could become a real problem for FedEx and all of the major carriers. They did not do the hedging properly. So even though they put out guidance and a higher guidance, I think they haven't really brought in how strong their hedging strategies have been, which is the major expense to FedEx, besides employees. Okay, and that's so interesting because I've read all of the B-cells

1:02side notes today. I have not seen that specifically called out. So really great mention there. In Christopher, you've also called out this quarter as really proof of this turnaround story at FedEx. So what specifically in the earnings report gives you the most confidence that this improvement is now being seen as sustainable? Yeah, well, I think you're seeing in the margins, you're seeing the overall efficiency for FedEx and it's going through the numbers. I think the founder Fred Smith is certainly a tough act to follow, but new CEO Raj, some Raniyan is really doing doing a great job. You're starting to see I think FedEx is giving us one of the best examples of industrial AI and the digital efficiencies in action. The things they're talking about in terms of their data products, the scoop that they have in some of their warehouses to move packages around. There really could be one of the best examples of companies putting that technology into action and it flowing through the bottom line. I also think it really stood out to me on the call that they were bringing in some new leadership to grow the healthcare part of the business. And what FedEx seems to be doing is they're shifting from just having that ground business and

2:07trying to replace what was the golden goose of document delivery and that those FedEx packages and overnight, e-signatures really eviscerated that business over the years and healthcare, whether it's samples, drugs, things that need to be temperature controlled, these really value added higher margin businesses is something that FedEx is looking to grow and that's just a really great thing for them to grow their business and keep strong margins. Okay, and Ed, we know this stock has, I mean, continued to climb over the past three months and today is no exception, although giving back some of that strength here in real time. But I do think it's interesting that this earnings we saw kind of the tail of two segments where freight was, I mean, a substantial mess. Well, then on the other hand, we saw Express continue to be a standout. And so as far as continual confidence in this operational and growth trajectory, does the, some of the weakness we're seeing in freighters that are specific segments give you any pause or are you still paying attention to more of what's working clearly for FedEx? Well, I just look at pure earnings,

3:07regardless if they come from freight or if they come from, you know, light parcels if you want to call it that. And I do believe that the stock is overpriced at this point. So I would not be a buyer of it at these levels. And regardless if it comes from freight, although freight, you know, has been, a lot of the freight has been taken away by UPS and I, I'm not exactly sure why, but UPS is freight has increased tremendously versus FedEx. So I think that that's something that they should be aware of and should be looking at really carefully. Yeah, a good point there. And Christopher, we know that FedEx has been pushing more into this digital intelligence and physical AI, even the logistics arm of the economy is not safe from the AI conversation. So how meaningful though is this technology? And I mean, are we seeing this going to be a major really driver of profitability going forward? Oh, well, I think it is. I think what our biggest FedEx input cost is

4:07going to be labor, it's going to be energy energy. You can hedge, but labor, you can start to replace with technology, you can get more efficient, whether it's routes, whether it is moving things around in the warehouse, getting more robots in. I think while everyone likes to get excited about, chatbots and LLMs, some of the most exciting applications of AI and the current technological revolution are the industrial applications, whether it's robots, whether it's just overall efficiencies and working 24-7. I think those are really going to be a big economic driver and you're starting to see it pull into action at FedEx. Okay, so Eddie of a price target of roughly $393 a share, which implies, I mean, about $8.5 for an upside. And so what coming catalysts do you see then driving? I mean, continual strength in this resiliency in FedEx as we look a bit more into the future? Yeah, well, I think that they just get more efficient and to kind of, you know, right on the back of what was just said, more efficiencies come from AI and technology and the

5:11manpower is a very big expense to FedEx. So as they're increasing margins and they've been doing it for the last six quarters, increasing the margins, they haven't increased the business so much as they have on the margin side. And I think increasing the margins is going to help with the earnings and earnings obviously are a pre-teller to higher stock prices. Okay, so Christopher, last but not least, you have highlighted. I thought this is so interesting. This specialty healthcare delivery is now an attractive and high margin opportunity for growth. And so how is this then changing really FedEx in real time, especially as we know some of their more traditional delivery outlets are going away? I mean, rapidly. Well, it's tech and action. That's sort of whether you're delivering vials, vaccines, samples, you have to be able to have an end-to-end control over that whole cold chain system. You need a lot of technology. You need to be able to show exactly when it was, where it was, what the temperature was. And that's the type of business that

6:11technology allows you to be able to do. And I think we're going to see FedEx do more of that. And that type of thing is going to flow through into the margins. You know, you don't make the most money moving around Amazon packages or web commerce, but you need that to keep your network going. But when you can layer in these packages from healthcare, replacing some of that high margin, very boring document delivery business, that Fred Smith built out so brilliantly over 50 years ago, that's really going to be the next generation of FedEx, especially once they spin off that freight division this year, which is going to be very interesting. We're very excited about the spin-off, large cap industrial spin-offs are a key area of interest for us. And we think FedEx freight could really be a leader in that space. Yeah, and I definitely think encouraging today that we are continuing to see this, this outperformance, I know we've pulled back, but again, still a green day for FedEx, all things considered. I appreciate you both. Advertikowski, managing partner of chaplain investments in Christopher Davis, partner at Hudson Value Partners.