Thursday, August 9, 2007

Freightway's Delivers

Freightways Ltd [FRE.NZ] , the domestic courier and Australasian document manager, delivered a small increase in profit for the 2007 year at the beginning of this week. Profit was just a tick over $NZ25 million, 3% up on 2006.
Freightways should be able to weather the
coming economic downturn.

Management put that down to a "softening" economy and increasing business costs. Something all New Zealand businesses have had to cope with since the Labour Government have been in power.

An interesting paragraph comes at the end of managements announcement to the market and this is where I want to focus this article on:

Freightways' performance will in the near term be influenced by a challenging New Zealand marketplace. Medium to longer term and subject to business factors beyond its control, Freightways is exceptionally well positioned in all aspects of its business to continue to achieve positive performance for its shareholders and all other stakeholders.

Just how Freightways' Management have positioned themselves for the future is an interesting point to follow.

The strategy seems to have them move away from their core courier and postal services and towards information/document management and that has seen Freightways head West towards expansion in Australia.

Now I have nothing against expansion and growth or Australia but and it is a very big but we all know that across the Tasman lie the graves of many aborted attempts at Kiwi companies "spreading the risk" by shooting the ditch. The Warehouse (WHS) Telecom(TEL) Hallenstein Glasson (HLG) and Sky City Entertainment(SKC) have tough there to varying degrees.

What worries me about Freightways push there is that if they have underestimated how tough competition is and the differences in business culture, then the company is going to struggle like the aforementioned ones. Freightway's management have a good track record but as we all know history cant always be the judge of what business leaders do going forward.

Another niggle I have is that Freightways core business has been the courier postal arena and moving away from a companies main area of expertise can be a dangerous thing if it is not done right. History is littered with the corpses of companies who have moved from the area of their expertise just to "diversify" company earnings. There is nothing wrong with sticking to what you know.

Now I'm not saying this is going to lead to Freightways going belly up but I have seen too many companies from New Zealand "diversify" (I hate that word but it is the one that is used to describe multifaceted earnings streams) because our market is small and management want to soften the economic cycles a specialist company faces. It can often work the opposite way if done wrong. Its like Coke making tyres for goodness sake!

Having said that, If management have been on the ball with their diversification then they will reap the rewards of good stewardship. When the next upwards swing happens after the current downwards cycle dissipates, then we will start to see Freightways grow as it has in the past, strengthen its dominant position in its courier and postal divisions and perhaps look again to Australia for growth from its document management acquisitions.

The courier and postal business in New Zealand is ripe for acquisitions from overseas companies and within. NZ Posts' business is looking to grow further and there are global logistics companies that would be interested in acquisitions or a local "partner" here.

Long term Freightways looks to be a solid deliverer.

Disclosure I own FRE shares

Freightways @ Share Investor

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