FedEx Has a High Level of International Exposure

In this article let's take a look at FedEx Corporation (FDX, Financial), the leader in global express delivery services that provides guaranteed domestic and international air express, residential and business ground package delivery, heavy freight and logistics services.

Key markets

FedEx has survived various economic cycles and oil supply crises. Although short-term results were hurt, the firm continues to be a candidate for your portfolio.

The company continues to grab growth opportunities internationally. 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 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.

We believe the firm could exploit its competitive advantages in the future, despite the challenges of fuel price shocks and global economic cycles.

Fuel efficiency

The company saw a 5 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 fuel consumption are key areas for increasing productivity.

In the Freight segment, FedEx expects to invest in technology to upgrade network andequipment and automation. Given theaccelerated 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.

Weak scenario?

In a weak environment of volume and growth on international economy shipments, FedEx is realigning its express fleet capacity to better satisfy customers.

The company focuses on higher margins in LTL and international express businesses because they are expected to boost revenue growth, assuming that international volume will increase over current levels.

Strong cash

Dividends have been paid since 2002, and dividends consistently increased every year. The board of directors approved a 33.3% dividend increase to 20 cents per share. FedEx pays a dividend yield of 0.5%.

Revenues, margins and profitability

Looking at profitability, revenues increased by 5.98% and led earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($2.10 vs $1.53). During the past fiscal year, the company increased its bottom line. It earned $6.79 versus $4.92 in the prior year. This year, Wall Street expects an improvement in earnings ($8.99 versus $6.79).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a current ROE of 13.7% which is higher than the industry median and the one exhibit by Atlas Air Worldwide (AAWW, Financial), but lower than Park-Ohio Holdings (PKOH, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, United Parcel Service (UPS, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

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.

In the table above we can see that the stock is relatively undervalued when compared to United Parcel Service Inc. and the industry median but trades higher than Atlas Air Worldwide Holdings Inc and Park-Ohio Holdings Corp.

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 20,547, which represents a 15.5% compound annual growth rate (CAGR).

Final comment

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

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 second quarter of 2014. Jim Simons (Trades, Portfolio) bought the stock, while Paul Tudor Jones (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Chris Davis (Trades, Portfolio) have taken long positions on it.

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