FedEx & UPS Trapped in Legal Battle - Analyst Blog
16 November 2012 - 11:40AM
Zacks
A criminal investigation on illegal
drug shipments against two of the biggest global logistics
companies – FedEx Corporation (FDX) and
United Parcel Service, Inc. (UPS) – is what the
market least expected from an industry, especially when the market
is already dwindling with poor demand trends.
The biggest players in the parcel
industry are now under the scrutiny of federal grand jury for
dealing in shipments of illegally operated online pharmacies. Both
the companies have already mentioned this legal probe in their
regulatory filings and expect the case to be
reconsidered.
However, there is hardly any
near-term visibility in the dismissal of such litigation as recent
investigations project difficult times ahead for both FedEx &
UPS. According to reports, the case dates back to 2005, when an
investigation done by the U.S. Drug Enforcement Administration
(DEA) exposed approximately 4600 online pharmacies that were
operated illegally.
The disclosure was followed by an
immediate shutdown of these online stores and several arrests were
made that resulted in further investigations proving involvement of
shipping companies. According to news, recent arrests pertaining to
the case have revealed involvement of FedEx and UPS in delivering
drugs without proper prescriptions. However, the companies have
been in denial regarding such revelations.
In July 2006, UPS and FedEx both
served subpoena from grand jury as a part of the investigation by
the Antitrust Division of the U.S. Department of Justice. The
subpoena required them to furnish records that could provide an
insight into possible antitrust violations in transportation of
packages for online pharmacies.
Although this legal battle has been
going on for many years, it did not draw much attention. Even now,
the market seems to be less responsive with no significant changes
in the stock prices of FedEx and UPS.
Regulatory issues have not been new
to the parcel industry. Companies like UPS and Expeditors
International of Washington Inc. (EXPD) have been in the
news earlier this year for price fixation. In March 2012, the
European Union (EU) commission’s antitrust regulators have charged
$225 million as fine to 14 international freight forwarding
companies for perusing price fixing activities for freight
transactions in Europe.
According to investigation under
the EU commission antitrust department, these logistics companies
were involved in four cartel activities, fixing air freight prices
between 2002 and 2007. Cartel activities that are undertaken
through the collusion of various groups of people or companies
involve fixing of any underlying factor that influences market
behavior, such as price or production, in order to reduce
competition and derive maximum benefit from consumers.
Coming back to the news, how far
these shipping companies can be held responsible for verifying
prescription before delivering medical products is yet to be
proven. As a matter of fact, do these shipping companies really
have a contractual binding beyond delivering goods to the user end
in desired condition? Was there any rule set in the preview of
federal laws that establish regulatory bindings for shipping
different products or something as cautionary as drugs?
Further, nothing much has been
revealed in the investigation regarding the nature of the drugs
shipped i.e., whether these were merely over the counter drugs or
involved prescription drugs. In addition, it is also not
transparent that these shipping companies actually verified records
on legality of such online pharmacies with which they held business
transactions.
All these questions still remain
unanswered but in the coming days we expect more visibility in this
legal action.
We assume the legal proceeding may
not have a material adverse impact given the mammoth financial
strength of these companies. However, the rising number of
litigations does call over a closer look into the existing
regulations that continue to govern the freight forwarding
companies.
The emergence of e-commerce does
not only require advancement of technology but also calls for a
revival of age old laws that continue to govern modern day
businesses. As for the parcel industry, will there be any change in
the regulatory environment yet to be discovered. Even if the change
does take place, the benefits it would have for carriers as well as
consumers would be something to watch out for.
We have a long-term Neutral
recommendation on UPS and FedEx. The stocks retain a Zacks #3 Rank,
implying a short-term (1-3 months) Hold rating.
EXPEDITORS INTL (EXPD): Free Stock Analysis Report
FEDEX CORP (FDX): Free Stock Analysis Report
UTD PARCEL SRVC (UPS): Free Stock Analysis Report
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