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FedEx Delivers Holiday Cheer for Shareholders

Booming e-commerce and wider margins are paying off


best stocks for 2012 logoSanta’s busiest night of the year might be Christmas Eve, but Dec.12 was crunch time for his holiday package-delivering peer FedEx (NYSE:FDX). It shipped 17 million packages that Monday — the company’s biggest day ever and nearly double its normal daily volume. The delivery boom — combined with a hefty boost in sales and net income — makes a pretty nice present for FDX shareholders.

Sure, rival UPS (NYSE:UPS), whose biggest volume delivery day was Dec. 22, boasted 26 million deliveries in one day. But Brown’s volume grew by only 6% over last year; FDX was up 10%. Robust growth in volume, sales and income illustrates that the business model company founder and CEO Fred Smith first floated in a college paper not only is still viable after 40 years, but continues to be innovative. Smith wouldn’t have it any other way.

The company that the former Marine Corps aviator founded under the “Federal Express” name continues to be “a stable blue chip that provides steady earnings growth,” as Paul R. LaMonica says in his InvestorPlace story that declares FedEx as his Top Pick for 2012. Last week, FedEx reported a whopping 76% increase in second-quarter net income — $497 million on revenue of $10.6 billion. Sales were 10% higher than the same quarter last year, and operating margins rose to 7.4% from last year’s 4.9%.

Overall, the holidays have been very good to FedEx — if you don’t count a badly muffed computer monitor delivery that was caught on camera and went viral on the Web, flaming the company. In its unique style, FedEx fought fire with fire: FedEx U.S. Operations VP Matthew Thornton III replayed the incident three times during his YouTube video apology.

Still, one dumb incident shouldn’t be a spoiler. Here are four reasons FedEx is poised to soar in 2012 (and make LaMonica’s call a good one):

Booming E-Commerce. Business-to-consumer e-commerce is a huge market for FedEx. One reason is its big success with SmartPost, which economically delivers low-weight retail packages most of the way, with the U.S. Postal Service delivering the parcels to the customer’s door. Large volume increases with FedEx Ground and Home Delivery also accounted for much of the recent growth.

Boosting Rates = Better Margins. FedEx already has boosted its margins by about one-third, and a rate increase averaging 4.9% that takes effect on Jan. 2 should also offset its slip in Asia freight volumes. (UPS increased its rates by the same percentage). Yield management will continue to be the strategy for FedEx’s integrated less-than-truckload (LTL) freight business through 2012.

Fuel Efficiency. Fuel costs and volatility are the bane of every transportation carrier’s existence. So, while going greener is great for the environment, it’s just as good for the bottom line. FedEx wants eventually to mothball its gas-guzzling MD-10 air freighters. These three-engine behemoths are nearly four decades old. FedEx inked a deal with Boeing (NYSE:BA) this month to purchase 27 new, twin-jet 767-300 freighters, which should save a bundle on fuel. Delivery of the first three 767Fs is scheduled for 2014. FedEx, which already has deployed thousands of green vehicles, will work with Nissan to test a fleet of all electric NV200s in London next year.

Smith Keeps Delivering Value. The FedEx CEO’s reputation for innovation continues to make him the company’s not-so-secret weapon. Back in 1978, when Smith famously said, “The information about the package is just as important as the package itself,” he helped birth a supply-chain revolution.

At 67, Smith is still a visionary, telling attendees at a 2010 Wired magazine conference that he imagines a day when unmanned drone aircraft could be loaded with packages and transported from city to city, under the watchful eye of a traditionally piloted plane. “Think of it like a train where you have a locomotive and you put two or three or four or 10 cars — depending on what demand is — and the drones basically fly the exact same flight profile in formation,” he said.

While the Department of Homeland Security is likely to nix that idea — at least for the foreseeable future — Smith has a plethora of other innovative ideas ready to take his delivery business to the next level.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

Article printed from InvestorPlace Media,

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