In this article let's take a look at FedEx Corporation (FDX, Financial), the leader in global express delivery services, which provides guaranteed domestic and international air express, residential and business ground package delivery, heavy freight and logistics services.
Although revenue increased, when compared to the same quarter one year before, it was below the forecast. Also, the company reported weaker earnings than expected from analyst estimates. Earnings of $2.66 per share missed estimates of $2.68. Among the reasons we found were the currency translation and the falling fuel surcharges. After the earnings were released, the stock price plummeted by 3% to $176. In what we consider a five-year period, EPS has grown by 14% annually.
Key actions
FedEx has survived from various economic cycles and oil supply crises. We believe the firm could exploit its competitive advantages in the future, despite the challenges of fuel price shocks and global economic cycles. In the actual scenario of cheaper fuel costs due to lower crude oil prices, jet fuel is lower than in the past, and this is important for cost savings.
In addition, the firm will achieve cost reductions with its plan of retiring older aircraft. A total of 15 aircraft are going to be replaced by one of the best in the industry, the Boeing 767. It is expected a 20% decrease in operating costs, which would impact future margins in a positive way. By 2020, there exists a target of 30% improvement in fuel efficiency of its fleet. The investment plan searching for fuel-efficient aircraft, will need the allocation of great quantity of capital, but I think a long-term driver is the aircraft modernization, and the efficient fuel consumption, being areas for increasing productivity.
The company continues to grab growth opportunities internationally. In order to increase operations in Europe, the company recently announced a deal with TNT Express, which is one of the three main operators in Europe. If we summed both market share´s, we get about 17%, very close to the dealer, DHL with 19%. The firm keeps pace with rapid rate of expansion of Indian economy. Other investments across China, Mexico and Brazil will improve its competitive position.
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 | CompanyName | P/E |
| FDX | FedEx | 20.1 |
| UPS | United Parcel Service Inc | 29.4 |
| Â | Industry Median | 19.8 |
In the table above we can see that the stock is relatively undervalued when compared to United Parcel Service Inc. (UPS, Financial) but slightly above the industry median.
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 22,991, which represents a 18.1% 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 retiring old aircraft. Moreover, it is increasing investor return, backed by its strong financial strength from operational efficiency. For the future we expect overall growth in real GDP, industrial production, and consumer spending in the U.S. and globally, will benefit the company. So, although short-term results could hurt the company, I would recommend investors to consider adding FedEx for their long-term portfolios.
Hedge fund gurus have also been active in the company in the first quarter of 2015. Gurus like Daniel Loeb (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio) have initiated new position with 900,000; 1,211 and 1,440 shares, respectively. Further, Murray Stahl (Trades, Portfolio) and the funds RS Investment Management (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio) have increased their positions, too.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
