“For the same reasons that investors studied railroad stocks in the 19th and 20th centuries to understand economic trends, investors today increasingly focus on companies such as FedEx to divine the bigger picture.”
— John Persinos, managing director, Personal Finance
In the September 21, 2012, issue of our Personal Finance newsletter, managing director John Persinos spotlighted FedEx Corp. (NYSE: FDX) as a stock that’s well-positioned to gain as the global economy continues to recover.
Persinos also liked the fact that FedEx enjoys some key advantages over its rivals. United Parcel Service (NYSE: UPS), for example, struggles to streamline its operations in the face of an aggressive union, while the U.S. Postal Service, which also faces a strong union, as well as rising health care costs, ponders cutting Saturday delivery.
Readers who followed Persinos’ buy call have done well. FedEx is up 12.4% since his article was published, including a nearly 3% gain yesterday in the wake of the company’s latest earnings report.
Sandy Took a Bite Out of the Latest Earnings From FedEx
The company’s earnings reports continually grab investors’ attention, and that was the case again yesterday, even as Wall Street starts to gear down for the holiday season. That’s because many feel that FedEx, which stakes its reputation on fast, reliable delivery, is a good barometer of the direction of the broader economy.
FedEx’s shipping business has three main segments: FedEx Express, which accounted for 62% of the company’s revenue in fiscal 2012, offers worldwide delivery within one to three business days; FedEx Ground (22% of revenue) delivers packages throughout the U.S. and Canada; and FedEx Freight (12%), which ships less-than-truckload (LTL) deliveries.
In FedEx’s fiscal 2013 second quarter, it earned $438 million, or $1.39 a share. That’s down 12% from $497 million, or $1.57 a share, a year ago. Revenue rose 5%, to $11.1 billion from $10.6 billion. That beat the consensus forecast of $10.84 billion, but profits fell short of the $1.41 a share that the Street was looking for.
Superstorm Sandy was a big reason for the lower profits; the company said delays due to the disaster sliced $0.11 a share from its profits in the latest quarter.
FedEx Express—arguably the most closely watched segment of the company’s business—saw its revenue rise 4%, but operating income declined 33% as businesses continued to opt for slower, less-expensive shipping options to save money. Operating income rose 4% at FedEx Ground on higher shipping volumes and revenue per package. FedEx Freight’s operating income soared 90% as the division delivered more goods at higher profits and benefited from cost cuts.
The company sees its profits declining to $1.25 to $1.45 a share in the third quarter, but it stood by its previous earnings forecast of $6.20 to $6.60 a share for all of fiscal 2013, before charges related to its employee buyout program.
Big Jump in Online Shopping Is a Plus for FedEx
The company looks well-positioned to turn in a strong performance this holiday season, thanks to the strong growth of online shopping. Many websites are offering incentives, such as free shipping, as they battle to take market share from brick-and-mortar retailers. In response, chains are fighting back by offering similar deals to keep customers coming back to their sites.
The end result? A big jump in online shopping over last year. According to a December 16 report from ComScore, online buying is up 13% through the first 44 days of the holiday season, to a total of $33.8 billion. FedEx’s Ground business will be a direct beneficiary of this increase.
In the longer-term, the company should benefit from its ongoing international expansion, particularly in fast-growing markets in the Middle East, Asia and Latin America. For example, FedEx recently expanded its service from Asia to markets in the Middle East, which will result in shorter shipping times.
As well, the company continues to roll out its Priority Alert service, which it sells under contract to companies that have critical shipments, such as health care or financial firms.
Under this service, packages are wrapped in bright pink tape to mark their priority status when loading or unloading. These items also receive extra monitoring from a dedicated group of employees who can also provide more accurate estimates of delivery times. As well, Priority Alert Plus, aimed specifically at health care clients, offers services like dry ice replenishment and access to cold storage in order to do a better job of preserving these items.
Demand for this service should continue to grow as more companies move toward a just-in-time inventory model and health care services expand to cater to the needs of an aging population.
Cost-Cutting Plan Continues
At the same time, FedEx is continuing to lower its costs. Under its current restructuring plan, it is selling off non-core assets and reducing the size of its workforce. To that end, it began offering voluntary buyouts of up to two years’ pay to some of its U.S. employees.
In addition, FedEx is continuing to upgrade its aircraft fleet. In the latest quarter, it agreed to buy four more 767-300 planes, bringing its total order to 50, with deliveries starting in 2014. These aircraft are better on fuel and cheaper to operate than the company’s current models.
FedEx trades at 14.6 times its last 12 months of earnings, ahead of rival UPS with a p/e ratio of 22.4. The quarterly dividend of $0.14 a share yields 0.60%.
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