Transportation/Logistics Research

April 15, 2010

FedEx Corporation (FDX)

Takeaways from Recent Management Meetings and SmartPost Field Trip

Price: (4/15/10) 95.62 Rating: Neutral FY May 2009A 2010E 2011E

52WK H-L: 98 - 49 Q1 1.23A 0.58A 1.01E
Market Cap (mil): 30,072.49 Suitability: Average Risk Q2 1.58A 1.10A 1.34E
Shares Out (mil): 314.5 Q3 0.31A 0.76A 1.10E
Float (mil): 292.2 Q4 0.64A 1.32E 1.64E
Avg. Daily Vol (mil): 3.19 Total 3.76A 3.76E 5.10E
Price Target: 100 FY P/E 25.4 25.4 18.7
Dividend 0.44 EPS (Cal) 2.79E 4.45E 5.53E
Yield (%) 0.46 P/E (Cal) 34.3 21.5 17.3

Please refer to Appendix - Important Disclosures and Analyst

Jon A. Langenfeld, CFA
jlangenfeld@rwbaird.com
414.298.1965
Benjamin J. Hartford, CFA
bhartford@rwbaird.com
414.765.3752
Certification.
Action
Recent management meetings reinforced constructive view on integrators.
Encouragingly, FDX commentary focused on pricing improvement throughout the
platform. FDX well positioned to benefit from an improving economy. The primary
potential sentiment near-term headwind, in our view, is the reemergence of costs to
support the cyclical recover, which could temper F11 guidance.
Summary
• We recently hosted investors meetings and a tour of FedEx's Smartpost facility with
IR and Ground CEO David Rebohlz. Below we highlight our takeaways:
• Pricing focus remains a top priority. FedEx articulated its focus on balancing
volume and pricing to effectuate a healthier pricing environment. As volume and
weight per package recover, we are encouraged by pricing growth commentary from
both UPS and FDX.
• International capabilities continue to expand. FDX growing a more compelling
international priority product through a number of international initiatives, including
development of domestic international services (China, Canada, Mexico, India, UK).
Within Europe, FedEx still lacks the scale of competitors, but management feels
comfortable with its organic growth prospects, using acquisitions where the
opportunities are presented.
• Costs will dampen near-term growth rate. Incentive comp, 401(k), pension and
increased maintenance/operating expenses all serve as headwinds for 2011. These
collectively could impact F11 over $500 million compared to F10. These are costs
necessary to support the strong volume growth, but may dampen F11 guidance, in
our view.
• Smartpost tour provides a deeper understanding of FDX's fastest-growing
business. Smartpost, FedEx's lightweight ground residential shipping solution,
continues to take share through its low-cost delivery solution. FedEx has a complete
US network, strong growth performance (31% five-year volume CAGR) and
expanded service offering (international and returns offerings). While a small part of
total revenue (6% of Ground, <2% of total), Smartpost serves as an attractive part of
an overall service portfolio for shippers.
FedEx Corporation
April 15, 2010

Details
A Closer Look at SmartPost
In 2004, FedEx purchased Parcel Direct, a leading small parcel consolidator for $122
million in cash. The offering provided FDX with a service offering that targets lightweight
residential delivery. FedEx rebranded the business as FedEx Smartpost and more than
doubled the network size. Over the last five year, Smartpost volumes grew at a 31%
CAGR, the fastest-growing part of FedEx. In F10, we estimate revenue will grow 23%, in
part aided by the demise of DHL in the US.

Focused on lightweight, business-to-consumer packages. Smartpost operates 24

primary hubs where parcels are gathered from FDX drivers or dropped off directly by
shippers. FDX processes the shipments through its the Smartpost network. At the end of
the network, FDX uses the US Postal Service for the final mile delivery, leveraging USPS
parcel price breaks by delivering palletized parcels directly to the local post office closer to
the customer. Over 90% of parcels are routed directly to one of 16,000 local post offices
used by Smartpost, the remaining parcels are routed to a USPS bulk mail centers primarily
because density is not available to justify direct shipment to the local post office. By
inserting the parcels into the USPS, FDX avoids the most costly part of the transaction --
home delivery.

Source: Company data

Lower-yielding, lower-service product for cost-conscious B2C shippers. Average

gross price of Smartpost parcels is $3, of which approximately half is the purchased
transportation cost paid to USPS for final mile delivery. This compares to average Ground
parcel of $7/package and average Express box of $19/package. Lower average gross
price is attributable to lower package weight (typically 1-10lbs., capped at 20lbs.), no
delivery guarantee (avoids investing in peak volume capacity), and longer transit time.
Smartpost parcels typically deliver in 3-8 days, while traditional FDX ground delivers in 1-5
days and Express delivers in 1-2 days. Most importantly, this service offering fits into
the overall portfolio of service offerings provided to shippers.

Robert W. Baird & Co. 2

FedEx Corporation
April 15, 2010

FDX Portfolio Comparisons

FDX Express FDX Ground FDX SmartPost

Time 1-2 days transit 1-5 days transit 3-8 days transit
Delivery Time definite Not time definite USPS final delivery
Guaranteed Guaranteed No guarantee
Value High value Declared, up to $50k No declared value
Examples Pharmaceuticals Household goods, Catalog items, books
electronics, etc. computers, office, etc. media, apparel, etc.
Source: Company data

2009 was a record year for SmartPost. The strong growth this past year was largely
driven by business from DHL’s exit from the US ground market. DHL operated a
competing parcel consolidation offering but also provided core ground service to packages
that were better suited for the SmartPost network. Smartpost volumes accounted for an
estimated 25% of all ground parcel volumes in F10, and an estimated 6% of revenue.
Consistent with traditional ground, we believe that Smartpost yields double-digit operating
margins although on a lower average yield.

SmartPost Share of Total FDX Ground

8% 32%

Smartpost % of Total
7% 28%
Smartpost % of Total
Ground Revenue

Ground Volume
6% 24%

5% 20%

4% 16%

3% 12%
F1Q07 F1Q08 F1Q09 F1Q10
% Revenue % Volume

Source: Company filings, Baird estimates

Future Growth Opportunities, Greater Density Driving Improved On-Time

Performance. Smartpost initiatives will focus on volume growth by penetrating the
smaller-volume B2C shippers, leveraging current network density. Additionally, FDX sees
further opportunities to grow through offerings in international service (Canada) and parcel
return service. As can be seen in the chart below, as Smartpost continues to grow density,
service levels continue to improve providing greater opportunity to leverage technology
and scale. UPS has a similar offering they call UPS Basic. While few details have been
provided on the offering, our sense is that UPS has a smaller offering relative to
Smartpost.

Robert W. Baird & Co. 3

FedEx Corporation
April 15, 2010

SmartPost Service Improving with Density

99 2000

% On-Time Service

Volume (000)
98 1500

97 1000

96 500

On-Time Performance (Mnthly) Smartpost Volumes (Qrtly)

Source: Company data, Baird estimates

Will SmartPost Cannibalize Traditional Ground Business? We believe the short

answer is no, because the product is strictly limited to residential deliveries and only for
lightweight packages. For example, major customers include online retailers. In its current
form, the USPS is not set up to handle heavyweight or larger packages; nor is it designed
for parcel consolidation in the B2B market. We suspect that over the past several years,
SmartPost has benefited from the trade-down effect of Ground customers moving to lower
level of service at a lower price point. However, management estimates that 70-80% of
their volume growth was share gains from competitors including the USPS.

Overtime, it is critical to monitor anything that could accelerate the trade-down

effect from Ground to SmartPost. Because although the profit margin of the two
offerings are similar, the margin dollars are significantly different given the differential in
the price point ($7 for a Ground package versus $3 for a SmartPost package.

Investment Thesis
Current thoughts. Recent results reflect an improving global freight environment with
demand across the business segments improving. FedEx's ability to effectively navigate
the downturn preserved the company's capabilities and longer-term earnings power.
Significant costs were removed during the past 18 months (near $3 billion). So, investors
will be focused over the next few quarters on how fast and how much of these costs will
return to the business. As a result, the magnitude of upward earnings revisions may be
buffered by incremental costs. Near-term outlook remains favorable and we believe the
current valuation reflects a balanced risk/reward, so we maintain our Neutral rating.

Diverse suite of leading transportation services. Recognized as the leader in global

express delivery, FedEx reaches over 90% of the world's GDP in 48 hours. After largely
completing a worldwide express network in 1997, FedEx successfully diversified its
service offerings. FedEx now operates the second-largest domestic ground package
delivery network, the largest regional less-than-truckload provider, and a leading
document services company. This portfolio should enable FDX to deepen existing client
relationships, expand its client base, and achieve market-leading growth rates.

Robert W. Baird & Co. 4

FedEx Corporation
April 15, 2010

Express trends critical to capital returns. Long term, we expect express global
package volume growth to exceed GDP growth as the parcel market become a greater
share of transportation spending in Asia, Europe, and the US. Growth of the Express
business is a critical component to sustain FDX's recent success improving margins and
capital returns. FDX must continue to work Express margins higher through growth and
productivity improvements. Every 100 bps of Express margin equates to roughly $0.50 in
EPS. While the current economic environment will limit margin expansion, over time we
expect the Express margin to improve 50-100 bps annually in a healthy economy.
Express performance is essential to improving FDX's modest returns on capital (average
10% ROC).

Sustainable leadership position in attractive markets. Global air cargo volume should
increase 5-6% annually over the long term. Industry leaders are benefiting from a number
of powerful trends including increases in globalization, supply chain complexity, and
demand for integrated logistics offerings accompanied by robust technology solutions. In
our view, few can match FedEx's scale and infrastructure, positioning the company to
enjoy long-term leadership in global transportation and logistics.

Share gains in Ground; opportunity in Freight. FedEx is taking market share in the
domestic ground package markets with FedEx Ground, and we expect Ground to
continue to deliver above-market growth rates as the company further leverages its
domestic and global capabilities. Additionally, FedEx Freight competes in the more
attractive regional LTL market. And though the company has struggled to integrate its
recent acquisition of Watkins into its LTL offering amid the trucking freight recession, we
expect its combined LTL offering to capture market share over the longer term by
leveraging its service-sensitive, low-cost model. This success should further diversify
FDX's business and improve overall company capital returns.

Valuation. Our $100 price target reflects roughly 17x our forward EPS estimates, one
year out, above its average multiple given an improving earnings outlook. FDX's average
multiple on forward estimates since 1999 is over 16x. Above-average multiple consistent
with near-term earnings near the trough of the cycle. In a better economy, we recognize
the potential for FDX to achieve sustained multiple expansion with an improving cyclical
margin story and rising estimates.

Risks & Caveats

Economic sensitivity. Impediments to economic growth or trade will negatively affect
growth and profitability. As an asset-intensive business, small changes in revenue can
create significant changes in operating profit.
Domestic express market. Growth potential is constrained in FDX's largest segment
Domestic Express due to the increasing reliability of time-definite Ground alternatives.
Further, rising fuel surcharges make the Domestic Express offering less price
competitive.
Ground independent contractor model being contested by the IRS and through driver
lawsuits. Unsuccessfully defending this model could negatively impact Ground
profitability.
Competes in highly competitive markets. Global transportation and logistics is highly
competitive and may be subject to price competition and deteriorating profitability.
Capital returns need to improve. FedEx's return on capital has historically been below
its cost of capital. Recent success has resulted in double-digit ROC, but there are not
guarantees these levels are sustainable.

Robert W. Baird & Co. 5

FedEx Corporation
April 15, 2010

Company Description
FedEx Corporation is a $33 billion leading provider of global transportation and logistics
services. Founded as a domestic air express company, management expanded
geographic and service coverage over the past two decades through organic and
acquisition growth. Operates through four primary operating companies.
• FedEx Express - Largest express carrier and largest cargo airline in world; offers
variety of time-definite express services within one to three days and serving markets
that comprise more than 90% of the world's GDP; segment includes Trade Networks, a
customs broker, freight forwarder division, and SupplyChain Systems, a logistics
service.
• FedEx Ground - North America's second-largest small-package delivery provider;
Home Delivery targets business-to-consumer transactions; nationwide coverage; also
includes SmartPost.
• FedEx Freight - Largest regional less-than-truckload (LTL); entered national LTL
market through Watkins Motor Lines acquisition (subsequently re-branded FedEx
National LTL); partnerships in Europe, Canada, Central and South America to provide
international door-to-door coverage; includes Custom Critical.
• FedEx Services - Responsible for sales, marketing and customer-facing information
technology. Segment includes FedEx Office (formerly Kinko's), the world's largest
provider of document solutions and business services with 1,800 locations worldwide
(over 135 internationally) providing copying, printing, remote access solutions, and
outsourced document management services.

Robert W. Baird & Co. 6

FedEx Corporation
April 15, 2010

Appendix - Important Disclosures and Analyst Certification

Rating and Price Target History for: FedEx Corporation (FDX) as of 04-15-2010
06/01/07 11/16/07 12/20/07 01/04/08 03/20/08 06/18/08 09/18/08 11/10/08 12/09/08 03/09/09 03/19/09
O:$125 N:$108 N:$105 N:$100 N:$98 N:$90 N:$92 N:$70 N:$65 N:$41 N:$50
120

100

80

60

40

20
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2
2008 2009 2010
06/17/09 09/11/09 09/18/09 12/08/09 03/08/10 03/18/10
N:$59 N:$79 N:$82 N:$93 N:$97 N:$100

Created by BlueMatrix

1 Robert W. Baird & Co. maintains a trading market in the securities of FDX.
Robert W. Baird & Co. and/or its affiliates expect to receive or intend to seek investment banking related
compensation from the company or companies mentioned in this report within the next three months.
Investment Ratings: Outperform (O) - Expected to outperform on a total return, risk-adjusted basis the broader
U.S. equity market over the next 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity
market over the next 12 months. Underperform (U) - Expected to underperform on a total return, risk-adjusted
basis the broader U.S. equity market over the next 12 months.
Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with
an emphasis on safety. Company characteristics may include: stable earnings, conservative balance sheets, and an
established history of revenue and earnings. A - Average Risk - Growth situations for investors seeking capital
appreciation with an emphasis on safety. Company characteristics may include: moderate volatility, modest
balance-sheet leverage, and stable patterns of revenue and earnings. H - Higher Risk - Higher-growth situations
appropriate for investors seeking capital appreciation with the acceptance of risk. Company characteristics may
include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and price
volatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high
degree of volatility and risk. Company characteristics may include: unpredictable earnings, small capitalization,
aggressive growth strategies, rapidly changing market dynamics, high leverage, extreme price volatility and
unknown competitive challenges.
Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a
time horizon of 12 months but there is no guarantee the objective will be achieved within the specified time horizon.
Price targets are determined by a subjective review of fundamental and/or quantitative factors of the issuer, its
industry, and the security type. A variety of methods may be used to determine the value of a security including, but
not limited to, discounted cash flow, earnings multiples, peer group comparisons, and sum of the parts. Overall
market risk, interest rate risk, and general economic risks impact all securities. Specific information regarding the
price target and recommendation is provided in the text of our most recent research report.
Distribution of Investment Ratings. As of March 31, 2010, Baird U.S. Equity Research covered 613 companies,
with 47% rated Outperform/Buy, 50% rated Neutral/Hold and 3% rated Underperform/Sell. Within these rating
categories, 11% of Outperform/Buy-rated, and 7% of Neutral/Hold-rated, and 12% of Underperform/Sell-rated
companies have compensated Baird for investment banking services in the past 12 months and/or Baird managed
or co-managed a public offering of securities for these companies in the past 12 months.
Analyst Compensation. Analyst compensation is based on: 1) The correlation between the analyst's
recommendations and stock price performance; 2) Ratings and direct feedback from our investing clients, our sales
force and from independent rating services; and 3) The analyst's productivity, including the quality of the analyst's
research and the analyst's contribution to the growth and development of our overall research effort. This

Robert W. Baird & Co. 7

FedEx Corporation
April 15, 2010

compensation criteria and actual compensation is reviewed and approved on an annual basis by Baird's Research
Oversight Committee. Analyst compensation is derived from all revenue sources of the firm, including revenues
from investment banking. Baird does not compensate research analysts based on specific investment banking
transactions.A complete listing of all companies covered by Baird U.S. Equity Research and applicable research
disclosures can be accessed at
http://www.rwbaird.com/research-insights/research/coverage/research-disclosure.aspx .
You can also call 1-800-792-2473 or write: Robert W. Baird & Co., Equity Research, 24th Floor, 777 E. Wisconsin
Avenue, Milwaukee, WI 53202.
Analyst Certification. The senior research analyst(s) certifies that the views expressed in this research report
and/or financial model accurately reflect such senior analyst's personal views about the subject securities or issuers
and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific
recommendations or views contained in the research report.
Disclaimers
Baird prohibits analysts from owning stock in companies they cover.
This is not a complete analysis of every material fact regarding any company, industry or security. The opinions
expressed here reflect our judgment at this date and are subject to change. The information has been obtained from
sources we consider to be reliable, but we cannot guarantee the accuracy.
ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST
The Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices
used to measure and report performance of various sectors of the stock market; direct investment in indices is not
available.
Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the
United States Securities and Exchange Commission, FINRA, and various other self-regulatory organizations and
those laws and regulations may differ from Australian laws. This report has been prepared in accordance with the
laws and regulations governing United States broker-dealers and not Australian laws.
Copyright 2010 Robert W. Baird & Co. Incorporated
Other Disclosures
UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which
Robert W. Baird Limited holds an ISD passport.
This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the
Financial Services and Markets Act 2000 (financial promotion) order 2001 being persons who are investment
professionals and may not be distributed to private clients. Issued in the United Kingdom by Robert W. Baird
Limited, which has offices at Mint House 77 Mansell Street, London, E1 8AF, and is a company authorized and
regulated by the Financial Services Authority. For the purposes of the Financial Services Authority requirements,
this investment research report is classified as objective.
Robert W. Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license.
RWBL is regulated by the Financial Services Authority ("FSA") under UK laws and those laws may differ from
Australian laws. This document has been prepared in accordance with FSA requirements and not Australian laws.

Ask the analyst a question Click here to unsubscribe

Robert W. Baird & Co. 8