by Dan Burrows | March 20, 2013 12:42 pm
Is it time to buy FedEx (NYSE:FDX) on the dip? Again?
Shares in FedEx — the world’s largest international air shipping company — tumbled Wednesday after quarterly profit fell 31% on weakness in Asia and charges from cost-cutting efforts.
Even worse, FedEx slashed its current quarter and full-year earnings forecast to levels below Wall Street’s estimates. As recently as December, the global shipper predicted full-year earnings of $6.20 to $6.60 a share. Now it says profits will hit $6 to $6.20 a share — not including all those restructuring charges. Analysts, on average, expected FedEx to deliver earnings of $6.35 a share for the current fiscal year.
Taking that kind of hatchet to the earnings is a quick way to make a stock look pricier. But the shellacking FedEx suffered Wednesday is likely overdone — at least if recent history is any guide.
The same issues troubling the company today have been weighing on it for the better part of a year. From Europe to Asia to the big emerging markets, the global economy continues to wheeze.
The European Union and eurozone are in recession or damn close. The U.K. looks like it’s going to hit a triple-dip recession. China is slowing down markedly. So is India. And Brazil is barely in positive territory.
Meanwhile, as continues to be the case, the real killer for FedEx has been ever-weaker results in its Express service — the premium (and higher-margin) business that companies use to move things lickety-split. Yes, the biggest revenue-generating segment of FedEx’s business — the one most sensitive to macroeconomic heat — is still cooling down.
But demand has not collapsed. Indeed, FedEx’s revenue topped Wall Street’s expectations for last quarter.
Which is a long-winded way of saying that none of this is new. FedEx issued a quarterly profit warning tied to these very same issues back in early September. And even with Wednesday’s early selloff, shares are up 18% since that time, beating the broader market by 7 percentage points.
The better news this time around is that FedEx is moving to staunch the bleeding in the Express business. There’s just too much industrywide capacity for the relative paucity of goods in need of overnight shipment from Asia and other international markets, and it’s whacking margins.
So FedEx is cutting back, taking older planes out of service and buying out employees. That should make further weakness in Express less of an albatross going forward. Over the next four years, FedEx figures it can squeeze an additional $1.7 billion in profits by slashing expenses in its Express division.
Cost cuts are horrible for employees, but they sure are welcomed by shareholders. And, in another shareholder-friendly move, FedEx authorized a stock buyback program for up to 10 million shares.
The latest selloff has shares looking pretty cheap on a forward earnings basis — even after taking the cut to forward earnings into account. At just $6 in full-year earnings per share (the low end of FedEx’s guidance), the stock trades in line with its own five-year average forward P/E of 16. Looking to fiscal 2014, it trades at less than 13 times forward earnings, or nearly a 20% discount to its own five-year average.
That’s a pretty compelling relative valuation, as is the fact the FedEx is much cheaper than the broader market — the S&P 500 goes for 18 times forward earnings — all while having a higher long-term growth forecast (13% for FedEx against 9% for the S&P).
Yes, it’s bound to be a bumpy ride as long as the global economy continues to underperform, but the valuation, cost cuts and share buybacks should help FedEx continue to deliver more market-beating returns in the long run.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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