FedEx: Slow and Steady Will Win the Race

If you told me back in January that FedEx (NYSE:FDX) would be up nearly 11% for all of 2012, I would have been happy with that. But that’s how much my pick in the Ten Best Stocks for 2012 contest has gained just through mid-March. And that includes a nearly 3.5% drop on March 22 after the company gave earnings guidance that disappointed investors.

I still like FedEx. I am not worried that the company is being prudent and issuing a forecast that isn’t as strong as many had hoped. FedEx, like many other cyclical stocks in the market this year, might have gotten ahead of itself. The economy is improving. But anyone holding onto the naïve hope that we are in for one of those V-shaped, hockey-stick or whatever other kind of shape recovery that involves GDP growing at — to quote Dark Helmet in Spaceballs — “ludicrous speed” is deluding themselves.

FedEx should, however, still benefit from slow and steady rises in consumer spending this year. The company did have a great holiday quarter, after all, with revenue up 9% in its fiscal third quarter (ended in February 2012) from a year ago.

Sure, there are some risks with this stock. If fuel prices keep climbing, those extra expenses could eat heavily into FedEx’s profits. And UPS’ (NYSE:UPS) recent acquisition of Dutch shipping company TNT Express might make it tougher for FedEx in Europe. But at the same time, the elimination of one major global shipping company — you’re really now left with just Big Brown, FedEx and DHL — actually could boost pricing power for the survivors. So the TNT deal might not explode (couldn’t resist) in FedEx’s face.

Finally, FedEx still is a relative bargain, even after factoring in the stock’s rise this year. Shares trade at 14.5 times fiscal 2012 earnings estimates and profits are expected to increase by 29% this year. Longer-term, FedEx’s earnings are forecast to rise by about 14% annually, on average, for the next few years. That’s a touch higher than UPS’ projected growth rate. Yet UPS trades at about 19 times 2012 earnings forecasts.

I am not sure why Big Brown deserves that much of a premium to FedEx.

Paul La Monica is an editor at CNN Money and the brains behind the news outlet’s daily markets column, The Buzz. You can email him here or follow him on Twitter via @Lamonicabuzz.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

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