Quick now what's the hottest stock issue of 1978? No, it's not Resorts International (the first entry into Atlantic City gambling). Resorts has been public a long time. Give up? Its Federal Express Corporation, the Memphis-based explosively growing national air freight company whose orange, white, and purple delivery vans are becoming almost as conspicuous in some metropolitan areas as the local taxi. The stock, which came out early in April at 24, skyrocketed to a recent record high of 47 1/2 in the volatille over-the-counter market. What you ask, is behind it all?
For some insights, I recently went to hot, sticky Memphis (population: 775,000) to see the company's dynamic founder: 33-year-old Frederick W. Smith. A graying rich kid who made it on his own Smith is a noteworthy example of the imaginative and aggressive entrepreneur who is still alive and throbbing in the South.
About 12 years ago - when he was 21 - Smith turned in his college thesis at Yale. Its premise: There's no way airlines can compete effectively with either truckers or railroads in the transportation of bulk freight. However, after exhaustive research. Smith saw glowing potential - a booming business in fact - in an airline service that could deliver overnight small (under 70 pounds), high-priority packages. These products would run the gamut from integral parts of computers and diagnostic equipment to human organs and legal briefs. His skeptical professor didn't think such a business had a ghost of a chance, considering the airline industry's intense competition and heavy regulation. Nevertheless, he gave Smith a passing grade but a mediocra one - a C.
I had drinks with Smith at his new $275,000 twelve-room home in the heart of Memphis, and he laughed about that college incident. Said Smith: "The professor didn't understand how the goddman world worked . . . that America was spreading out technologically . . . that the efficacy of our society is to be smarter, not to work harder. This meant the creation of a host of new productivity-improving equipment with innumerable comples parts . . . And the need for early delivery of such items was becoming as urgent between Appleton, Wisconsin, and Lubbock, Texas, as it was between New York and Chicago . . ."
A Vietnam veteran with more than 200 combat mission and the son of a wealthy businessman who founded Dixie Greyhound Bus Lines, Smith didn't have an easy time getting Federal Express off the ground. There were times, in fact, Smith may have thought his professor was right. Federal Expres incorporated in the summer of 1971 (Smith was 26 at the time), didn't begin its air freight service until April of 1973. In the previous year - while the mechanics of the business were being thrashed out - the company ran chartered flights.
It was agony the first few years. The first profitable month wasn't until July of 1975, and there were major financing problems. In fact, things got so bad in early 1973 that the 150 employees on the job that year were asked not to cash their checks right away. Around the same time, Smith was in Chicago trying to raise capital. He didn't get it. But later that year, the company managed to raise $24.5 million in venture capital, and these funds, plus another $31.5 million in bank loans, enabled the company to keep its head above water.
As it turned out Federal Express developed into one of the biggest venture-capital deals ever, with investors anteing up $91 million in the first three years for Smith's bold scheme. Surely there were days when some of them must have thought it a harebrained scheme as Federal Express racked up wicked losses of $29 million in its first 26 months.
But that was yesterday, and the company's growth since then has been meteoric. In April of 1973, the company, aside from its 150 employees, had 10 aircraft, served 22 cities, and delivered 15 packages the first night. Today, there are 2,800 full-time employees (4,200 all told). The fleet has since swelled to 69 aircraft (both owned and leased). The company delivers 35,000 packages a day (at around $22 each) and services 130 major markets and 15,000 communities.
Accompanying this expansion, at least recently, has been rapid growth in both sales and earnings. For example, in its most recent fiscal year, ending last May 31. Federal Express's pretax earnings shot up to $20.6 million from $8.2 million a year earlier. On a pershare basis, reflecting the company's recent recapitalization and stock offering for the past year, earnings jumped to $3.53 a share from $1.01. And revenues ran up to $160 million from $109.2 million.
Importantly, too, there has been a dramatic improvement in the balance sheet. As of a year ago, equity capital had shrunk to $7.8 million in the fact of an awesome $52.5 million debt. Today, the company sports a $54 million net worth, and its total long-term debt has shrunk to roughly $33 million.
It all adds up to a sharply rising stock price, and probably nobody is more delighted at that rise then Smith himself. He owns about 465,000 shares and warrants (plus additional shares in a family-owned company) that are worth about $24 million. When I mentioned this, he bristled: "Money doesn't mean a damn thing to me," he says. "I don't need a lot of money, and I don't spend a lot of money."
I'm not about to question Smith's disdain for money. But it's worth noting that he was indicted in February 1975 - though later acquited in a jury trial - for allegedly obtaining funds from a bank by using false documents.
Thers's no doubt that Federal Express' future was considerably enhanced last November when legislation was passed that allowed the company to increase the previous limit of 7,500 pounds of cargo per plane. That chopped delivery costs a hefty 30 percent. But that same legislation is also likely to heighten competition - perhaps dramatically - in an air freight market (namely small packages) that is already 23 per cent controlled by Federal Express. So where does the company go from here?
The ever confident Smith told me that the market's strong growth potential (he estimates that 90 percent of all freight is actually small, express-type packages) - coupled with the company's momentum, heavy promotional bombardment, drive, and savvy - should permit Federal Express to continue to turn in above-average growth and achieve a rising market share. He sees the prospects of broader market coverage domestically and expansion into European markets. And there may be a brand-new lucrative business - Federal Express. Smith tells me, is planning to petition the Civil Aeronautics Board to permit the company's craft to get into the shorthaul passenger market during the day. At present, Federal Express delivers its packages to 83 airports in the wee hours of the morning.
Looking ahead, Smith figures fiscal 1979 should produce another rise in earnings to about $4.35 to $4.50 a share on revenues of between $200 million and $220 million. "We could earn more, but the expense side of the ledger will run pretty rich this year," he tells me. This is a reference to the heavy outlays the company will be pouring into new data, tele-communications, and operational systems. Smith believes a reasonable projection for fiscal 1980 is an earnings performance of about $5 a share on revenues of $260 million to $270 million.
Though Smith was born in Marks, Miss., he has spent most of his life in Memphis.
"Memphis is a horrible place," Smith told me. "There are serious structural problems when 30 percent of the people earn 70 percent of the income and 70 percent (primarily the blacks) get only 30 percent of the income. You have a massive underemployed black population, and it's not because the jobs aren't there or the blacks don't want to work. The real problem is that powerful interests in this city want the status quo maintained."