FedEx: Gaining Altitude

Almost exactly a year ago, in a September 21, 2012, article in our Personal Finance newsletter, managing director John Persinos recommended that investors buy shares of FedEx Corp. (NYSE: FDX), the world’s second-largest package delivery company, behind United Parcel Service (NYSE: UPS).

Persinos based his recommendation on a number of strengths, including FedEx’s non-unionized workforce, which gives it more flexibility to adapt to business fluctuations than UPS. He also liked the fact that FedEx’s air freight division was scrapping its older planes and replacing them with more fuel efficient models.

In addition, Persinos saw the growth potential offered by the company’s expansion into emerging markets like China, where it currently has a permit to operate on its own in eight cities, compared to five for UPS. (FedEx serves the remainder of the country through joint ventures.) China’s domestic express delivery market is expected to grow 20% annually over the next two decades.

Persinos’ call came at a delicate time for FedEx, which had just reported its first earnings drop since 2010, due to global economic weakness.

But 12 months later, the recommendation has paid off: FedEx is up 37.2% since his article was published, outperforming both the S&P 500 index (up 18.2%) and UPS (up 26.6%). Including dividends, FedEx returned 37.9%, compared to 29.9% for UPS.

FedEx’s Ground Game Still Looks Strong

In a June 20 Investing Daily article, we examined another long-term trend that FedEx is capitalizing on: the move toward online shopping. According to April 2013 figures from eMarketer, U.S. online retail sales will rise to $434.2 billion in 2017, nearly doubling 2012’s total of $225.5 billion.

This trend has helped FedEx’s ground-delivery division (which supplied 24% of its overall revenue in fiscal 2013) post strong results in recent quarters, including the company’s fiscal 2014 first quarter, results for which it reported on Wednesday morning.

During the quarter, FedEx Ground’s revenue rose 11% from a year ago, to $2.73 billion. Operating income gained 5%, to $468 million. The division saw an 11% increase in average daily shipping volumes, and revenue per package rose 1%. Average daily volume increased 26% at FedEx SmartPost, which deals with less-time-sensitive deliveries, mainly due to rising online orders.

Adjusting to Fewer Air Deliveries

However, revenue at the FedEx Express air-delivery division slipped slightly, to $6.61 billion from $6.63 billion a year ago. That’s because the weak economy has been prompting penny-pinching businesses to opt for cheaper, slower options. FedEx Express accounted for 61% of the company’s total sales in fiscal 2013.

The company doesn’t see that trend reversing anytime soon: “You can understand why customers are trading down, because they get a significantly better price, and they give up a couple of days,” said CFO Alan Graf in the post-earnings conference call.

FedEx is adjusting through a significant restructuring, which it announced last October. Under this plan, it aims to save $1.7 billion annually by 2016 through a number of initiatives, such as voluntary employee buyouts, parking excess aircraft and buying more fuel-efficient planes.

In the latest quarter, the company’s efficiency improvements helped FedEx Express boost its operating income by 14%, despite the lower revenue. Operating margins widened to 3.6% from 3.1%.

In all, FedEx’s revenue rose 2.1%, during the quarter, to $11.0 billion. Per-share earnings gained 5.5%, to $1.53. The latest results were above the Street’s estimate of $1.50 a share in profits on revenue of $10.97 billion.

“Moderate” Growth Ahead

The company has long been looked to as an economic bellwether due to its global reach—it handles more than 10 million packages a day in 220 countries—and the fact that it serves nearly all economic sectors.

FedEx described global economic growth as “tepid” in its earnings release and stood by its forecast of full-year earnings growth of 7% to 13%, assuming U.S. GDP growth of 2.1% and global GDP growth of 2.6%.

“The FedEx economic forecast calls for continued moderate growth, both in the global and domestic economy,” said executive Mike Glenn on the conference call. The company also noted “signs of improvement” in China and Europe.

Separately, FedEx announced that it will hike rates at FedEx Express by 3.9% in January. The move comes after it increased rates at its FedEx Freight less-than-truckload delivery business by 4.5%, effective July 1. These figures are roughly in line with last year’s increases, but they do indicate that the company is confident the market will bear higher prices.

“It’s going to be another quarter or two in a challenging global environment, and the company’s taking the appropriate steps to right their cost structure, capacity structure and international routes,” Oppenheimer analyst Scott Schneeberger said.

Tapping Into African Growth

Meanwhile, FedEx continues to expand its international reach.

In June, the company announced that it will acquire businesses operated by Supaswift (Pty) Ltd. in five countries in Southern Africa, including Malawi, Mozambique, Swaziland and Zambia. FedEx is also reportedly in discussions to buy the courier’s operations in Botswana and Namibia.

It’s an opportune time for FedEx to expand in Africa, as the continent’s economy is growing strongly: according to the African Development Bank, one-third of African countries have GDP growth rates of more than 6%. In addition, the cost of starting a business has fallen by more than two-thirds in the past seven years, while delays in starting a business have declined by about 50%.

Meantime, FedEx continues to sport a strong balance sheet: it ended the quarter with $5.1 billion of cash, nearly double its long-term debt of $2.7 billion.

FedEx trades at 23.3 times its $5.00 a share it earned in the last 12 months. The average analyst estimate calls for earnings of $6.96 a share for fiscal 2014 (which ends May 31), with profits rising to $8.68 a share in fiscal 2015.