FedEx (FDX, Financial) has delivered strong results in the first quarter of 2014 and the stock has been gradually trending higher. FedEx has surged by 21.4% in YTD 2014, and I expect the stock to trend higher for the remainder of 2014 and in 2015.
The first reason to be bullish on FedEx is the company’s latest economic update (as of October 31, 2014). For FedEx, growth is directly related to U.S. and global economic growth and the company’s outlook for the remainder of 2014 and for 2015 is interesting to note.
According to the company’s economic update, U.S. GDP growth is likely to be 3.1% in 2015, which is higher than the country’s 2014 GDP growth. Further, world GDP growth is likely to be 3.0% for 2015. While I am sceptical about 3.0% world GDP growth in 2015, I believe that U.S. GDP growth is likely to remain robust in 2015.
Also, even if the global economy slows down in 2015, FedEx can still deliver strong results as marginal decline in global growth can be offset by increase in shipping rates for express, ground and freight services.
On September 16, 2014, FedEx had announced that it will increase shipping rates for the above mentioned services by 4.9%. I believe this increase will have an impact on a y-o-y basis and the quarterly results in 2015 will be strong. Any weakness in the shipping market due to relatively weak economic growth will be offset by an increase in shipping rates.
Besides increase in shipping rates in 2014, another positive factor that will work for FedEx in 2015 and beyond is an improvement in margin coming from a modern air fleet. The B757 aircraft is expected to reduce trip cost by 20% and the B767 is expected to reduce trip cost by 30%.
Therefore, the company’s financial goal of 10% to 15% EPS growth on an annual basis will be realized by increased volumes, higher shipping rates as well as improvement in key margins. The company’s operating margin has already improved from 5.5% in 2009 to 7.6% in 2014. I believe that the margin improvement will continue in the foreseeable future.
From a shareholder value creation perspective, I already mentioned earlier that FedEx has surged by 21.4% in 2014. Besides the stock upside FedEx has also been paying healthy dividends and the stock currently has a dividend payout of $0.8 and a dividend yield of 0.5%. The company generated $713 million in free cash flow in 2014 and if the company’s strong FCF continues, I expect increase in dividends and value creation through share repurchase.
FedEx is also not expensive at current levels even after a 21.4% rally in 2014. The stock currently trades at a trailing twelve month PE of 23.9 and a forward PE (May 2016) of 16.02. I expect the stock to continue to move higher in 2015 and if the company’s target EPS growth of over 10% is achieved, FedEx shares will remain positive.
In conclusion, FedEx has provided a positive outlook for the global economy in 2015 and in-line with this outlook, I expect the company to perform well as it is doing in the current financial year. The risk relates to a sharp slowdown in global economic activity and investors need to monitor this risk. However, a marginal global economic slowdown will send FedEx higher as increased shipping rates compensate for any decline in shipment volumes.
