June 26, 2019 / 3:28 AM / 4 months ago

Breakingviews - FedEx gets caught in a trade-war vise

The tail of a FedEx plane is seen during the presentation of the future extension of the FedEx hub in Roissy-en-France, North of Paris, France, October 18, 2016. Picture taken October 18, 2016. REUTERS/Philippe Wojazer

NEW YORK (Reuters Breakingviews) - FedEx is feeling the squeeze from the U.S.-China trade war. The $41 billion parcel carrier made a virtue over the past few years of being a global operator – not least in touting its unique position as the only overseas package hauler which owned its domestic and international operations in the Middle Kingdom in full. The worsening spat between Washington and Beijing, though, has caught FedEx in a vise.

On Monday the Memphis-based outfit founded and run by Frederick Smith revealed that it was suing the U.S. Commerce Department over onerous export rules. The government can hold carriers liable for shipments containing technology and other goods on a list of banned items. The Trump administration recently prohibited a number of Chinese firms from buying certain U.S. tech products. That places a large and possibly undue burden on FedEx –and rival UPS too, though it has declined to join the suit.

Being FedEx isn’t much easier on the other side of the world. Beijing last month launched an investigation after the company diverted two packages destined for offices of Huawei, the Chinese technology firm that Washington has deemed a security risk. FedEx also returned a Huawei phone to its sender in the United Kingdom. Both incidents were errors, it says. This has raised the risk of the company being put on a blacklist of what China dubs “unreliable entities.”

Imagine FedEx has to stop shipping items between the United States and China altogether. That’s manageable. Only 2% of its $71 billion in annual revenue comes from such flows. A broader ban from China would hurt more. The 7 percent drop in the stock price since late last week suggests shareholders estimate losing perhaps 8 percent of sales and $340 million of profit, based on 2020 earnings estimates provided by Refinitiv.

That’s still only a fraction of the $30 billion that investors have wiped off each of FedEx and UPS’s market value since hitting a peak in mid-January last year as concerns about tariff wars and slowing economic growth took hold. UPS, though, is in a stronger position. It brings in a tad more revenue, but its 8 percent net margin is a third better than its peer, while its shares have fallen half as much since the beginning of 2018. FedEx is losing this round of pass the political parcel.

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Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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