FedEx Looks Good After Results

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Faisal Humayun
Dec 19, 2014
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FedEx Corporation (

FDX, Financial) has moved higher by 21.3% in 2014, and I believe that this is a strong performance by the company. I also believe that FedEx is well positioned to move higher in 2015 and this article discusses the companys latest results and the reasons to be bullish on FedEx for 2015.

For the second quarter ended November 30, 2014, FedEx reported an EPS of $2.14 per share, which represents an increase of 36% from the comparable period EPS of $1.57. While the companys revenue increased to $11.9 billion from $11.4 billion in the second quarter last year, the companys operating margin increased to 8.5% as compared to 7.3% last year. The 120 basis points increase in margin was one of the key contributors to EPS growth.

I believe that the companys operating margin improvement will continue in 2015 due to lower oil prices. With a supply glut globally, it is likely that oil prices will remain around $60 to $70 per barrel in the coming year. With one of the significant costs being related to fuel, FedEx is well positioned to improve its operating margin significantly in the coming year.

I would also like to mention that FedEx has reaffirmed the companys 2015 earnings forecast at $8.5 to $9 per diluted share and this is taking into account moderate economic growth and the benefits from lower oil prices. At the higher end of the guidance, FedEx is still trading at a forward PE of less than 20 and I believe that the company has more upside in the coming year based on the valuations.

Besides the EPS forecast, FedEx has also reaffirmed that the company will be spending $4.2 billion in capital expenditure in the coming year, and I believe that the capital expenditure will translate into further margin expansion beyond 2015. The capital expenditure is primarily related to the companys fleet renewal into a more fuel efficient fleet of aircraft, and this will contribute to margin expansion beyond 2015.

The company has maintained its long-term goal of achieving 10% operating margin and with operating margins surging by 120 basis points in the second quarter, FedEx is well on track to achieve 10% operating margin in the coming years. The $4.2 billion capital expenditure coming next year will be the most significant step towards achieving the 10% operating margin.

In terms of the long-term EPS target, FedEx is looking at 10% to 15% EPS growth on an annual basis and I believe that this is entirely likely through sales growth (developed and emerging market) ,margin expansion and share repurchase. For the first half of 2015, the companys EPS growth has been 37% as compared to the first half of 2014. While this growth rate might not be sustainable, an EPS growth rate of 10% to 15% is entirely likely in the long term, and this will help the stock to move higher.

I must also mention here that in the last two years, FedEx has generated free cash flow of around $800 million on an average, and this gives the company ample room to repurchase shares and also pay healthy dividends. With the margin expansion likely to continue, I expect the companys FCF to get a boost. FedEx currently offers an annual dividend of $0.8 per share, and this is healthy and sustainable.

Therefore, among my investment themes for 2015, FedEx is one stock that can be considered for the portfolio for the full year. While slower economic growth can be a concern, it will be offset by lower oil prices that boost the companys margin and EPS.

In conclusion, I would also like to mention that FedEx is a low beta stock with a current beta of 0.57. A low beta stock is good to hold in the portfolio when markets can be volatile. While I expect U.S. markets to move higher in 2015, I also expect some degree of volatility.

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Faisal is a Senior Research Analyst with ten years of experience in equity research, credit research, economic research and financial modeling.