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FedEx Is a Leading Freight Carrier and a Right Pick for Tomorrow?

June 17, 2014 | About:

ovenerio

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In this article let's take a look at FedEx Corporation (FDX), the leader in global express delivery services, which is expected to report its revenue and earnings for the fourth quarter of its 2014 fiscal year tomorrow (June 18).

Growth Opportunities

FedEx continues to grab growth opportunities internationally while removing lower yield networks like the ones from the U.S. and Asia in July 2013. The firm keeps pace with rapid rate of expansion of Indian economy. Other investments across China, Mexico and Brazil will improve its competitive position. For example, FedEx Express has opened a new North Pacific Regional Hub in Japan and a new national hub in Mexico, with an initial investment of $48 million. The new hub in Mexico will perform domestic operations and reduce transit times, enhance pickup services and foster efficient deliveries throughout the country.

Focusing on Improving Fuel Efficiency

According to Zacks, the firm set a target of $1.6 billion in incremental profit for FedEx Express to be achieved by the end of 2016, mainly on the back of infrastructural developments.

The company saw a five percent fuel efficiency improvement in 2013 and plans a 2020 target of 30% improvement in fuel efficiency of its fleet. Furthermore, infrastructural developments like aircraft modernization, aircraft maintenance processes and fuelconsumption are key areas for increasing productivity.

In the freight segment, FedEx expects to invest in technology to upgrade network and equipment and automation. Given the accelerated investment plans toward deployment of fuel-efficient aircraft, FedEx projects capital expenditure of $4 billion for fiscal 2014, higher than $3.4 billion from the prior year.

A Hike in Shipping Rates

Higher rates for 2014 seem to be the key for revenues. A 3.9% hike in shipping rates at FedEx Express for U.S. export and import services was implemented. Further, FedEx Freight increased the shipping rates by an average of 3.9%. The rate change applies to shipments within the U.S. (including Alaska, Hawaii, Puerto Rico and the U.S. Virgin Islands), between the contiguous U.S. and Canada, within Canada, between the contiguous U.S. and Mexico, and within Mexico.

Finally, it also introduced FedEx One Rate a flat rate shipping system for individual shippers and small business entities. To ship using this system, customers select their free FedEx Express packaging, an eligible FedEx Express domestic shipping service and the destination. The FedEx One Rate price is then calculated based on the packaging type, service selected and distance.Additionally, it is backed by the FedEx Express money back guarantee.

Strong Cash

Dividends have been paid since 2002 and consistently increased dividends every year. The Board of Directors approved a 33.3% dividend increase to 20 cents per share. Fedex pays a dividend yield of 0.6%, and during the first nine months of fiscal 2014, the company repurchased 15.6 million shares for $2 billion. As of Feb. 28, 2014, the company had repurchase authorization existing for 15.2 million shares.

Earnings and Revenues

In the third quarter of fiscal 2014, the company´s top and bottom lines missed the Zacks Consensus Estimate. FedEx expects earnings of $2.25 to $2.50 per diluted share in the fourth quarter and $6.55 to $6.80 per diluted share for fiscal 2014. For the quarter, analysts expect FedEx to report revenue of $11.66 billion, which will represent a 2% improvement from the $11.44 billion management reported the same quarter a year earlier.

Relative Valuation and Price Performance

In terms of valuation, the company sells at a trailing P/E of 26.4x, trading at a discount compared to the industry mean.

Ticker

Company Name

P/E

FDX

FedEx

26.4

UPS

United ParcelService Inc

22.4

AAWW

Atlas Air Worldwide Holdings Inc

11.4

PKOH

Park-Ohio Holdings Corp

16.1

In the table above we can see that the stock is relatively overvalued when compared to United Parcel Service Inc. (UPS), Atlas Air Worldwide Holdings Inc (AAWW) and Park-Ohio Holdings Corp (PKOH).

In the next graph we can see the evolution of the stock price together with EPS. The reason is that earnings often lead the stock price movement. As we can appreciate, the price performance and EPS showed an interesting upward trend in the last five years. A long position of USD 10K five years ago today represents USD 26,537 (which means a 21.6% annual return).

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Final Comment

FedEx has several drivers which we discussed above such as the international opportunities, its fuel efficiency improvement and higher rates. Moreover, it is increasing investor return, backed by its strong financial strength from operational efficiency. We expect and overall growth in real GDP, industrial production, and consumer spending in the U.S. and globally, which will benefit the company.

In this opportunity, I would recommend investors to consider adding the stock for their long-term portfolios.

Hedge fund gurus have also been active in the company in the first quarter of 2014. Ken Fisher (Trades, Portfolio), David Dreman (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Chris Davis (Trades, Portfolio) have taken long positions on it.

Disclosure: Omar Venerio holds no position in any stocks mentioned.


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