To borrow a phrase from the company’s famous advertising slogan, it’s “absolutely, positively” no surprise that Federal Express Corp (NYSE: FDX), operator of the world’s largest cargo airline, is encountering temporary headwinds because of the weak economy. However, this delivery giant is en route to future growth.
Memphis-based FedEx encompasses four segments managed collaboratively under the aegis of its universally recognizable brand:
FedEx Express, the world’s largest overnight delivery company, offers time-certain delivery within one to three business days; FedEx Ground provides low-cost, small-package ground delivery service to every business address in the US and Canada, as well as delivery to nearly 100 percent of US residences; FedEx Freight handles less-than-truckload freight services; and FedEx Services provides other companies with sales, marketing and technology support.
FedEx in September projected its first earnings drop since 2010 as weak global economic growth, the continuing debt crisis in the euro zone and a slowing China depressed demand for the express packages that generate most of the company’s revenue.
For the first fiscal quarter of 2013 that ended August 31, FedEx will likely produce $1.37 to $1.43 in earnings per share (EPS), the company announced in September.
That estimate is less than the company’s June 1 EPS forecast of $1.45 to $1.60 and EPS of $1.46 during the same period a year ago. It would mark the first drop in EPS for FedEx since its second quarter that ended November 2010.
The stock has fallen nearly 3 percent since news of the company’s diminished expectations. However, the investment consensus is overly negative and ignores secular trends that should lift the stock of this speedy parcel-delivery specialist in the coming months.
A leading component of the Dow Jones Transportation Average, FedEx is viewed as a barometer of the wider economy. 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.
The second-largest package delivery company in the world, behind United Parcel Service (NYSE: UPS), FedEx will be an important brand name to watch as monetary policy in the US and Europe move to stimulate economic growth during the latter part of this year. More sanguine analysts already see FedEx’s fiscal second-quarter revenue moving 4 percent higher to $10.9 billion and EPS increasing by 7 percent to $1.56.
At the same time, slowing revenue has added impetus to FedEx’s cost-cutting campaign, which includes a voluntary employee buyout program and the grounding of aging, fuel-guzzling cargo planes.
Rising fuel prices played a major role behind FedEx’s earnings miss, but the company is mothballing roughly 20 older jet freighters this fiscal year, replacing them with newer Boeing 767-300 and 757-200 aircraft that burn less fuel and are cheaper to operate and maintain.
The company estimates that these combined efforts will eliminate up to $900 million in costs. The company is now earning 6 percent more per package so far this year, despite a 5 percent decline in total shipments, a sign that greater efficiencies are already taking hold.
Every day, FedEx Express’ global air-shipping network delivers an average of 3.4 million packages from more than 6,400 authorized shipping centers, totaling about 26.5 million pounds. Last fiscal year, the segment accounted for 62 percent of the company’s $42.7 billion in total revenue. In leaner and more efficient shape than any of its rivals, it’s poised to receive a huge boost when the global economy finally gets back on track.
Meanwhile, the company’s chief rivals are struggling with long-term challenges from which FedEx is immune. UPS, aka “Big Brown,” is saddled with an aggressive union that severely restricts the company’s ability to rein in costs and streamline its workforce, whereas FedEx is a non-union shop and is likely to stay that way.
Uncle Sam’s Woes
The US Postal Service, grappling with its own union problems and enormous health care obligations, is looking at eliminating Saturday delivery. In August, the USPS reported a $5.2 billion quarterly loss, prompting the Postmaster General to warn that delivery may be cut back to three days a week within 15 years.
FedEx is not only unencumbered with these limitations, but it’s also well positioned to capitalize on an economic rebound. Growth sectors such as technology and pharmaceuticals demand frequent speedy shipments with high assurance of delivery, which is the bread-and-butter service of FedEx. The company is an integral part of the increasingly extended global supply chain, equally trusted by huge corporations and mom-and-pop outfits.
FedEx also is opening scores of new stations in promising markets, such as China, Brazil and Eastern Europe, as part of an organic expansion plan. China presents the most exciting opportunities.
Chinese authorities recently granted both FedEx and UPS the freedom to operate in China without the burden of forming regional partnerships with local Chinese companies.
FedEx’s management estimates that the delivery market in China will grow by a whopping 400 percent from now until 2020, when it generates annual revenue of $26 billion. FedEx was given the ability to ship independently in eight Chinese cities, including the major industrial hubs of Shanghai and Guangzhou.
The stock’s price-to-earnings (P/E) ratio of 13.6 is attractive compared to the P/E of its arch rival UPS, which has been bid up to 18. To learn how you can uncover the most undervalued stocks, quickly and reliably, check out the free report, The 4 Secrets to Becoming a Great Value Investor.