3 Reasons FedEx Stock Is Still a Buy After Earnings Beat

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FedEx (FDX) stock hit a new 52-week high this week after its earnings soared by 24% in the most recent quarter. Perhaps even better news for investors: FedEx stock looks like it can still deliver, despite heated competition from rival UPS (UPS) and even the U.S. Postal Service.

FedEx stock FDXLet’s break down the numbers: On Wednesday, FedEx reported earnings of $606 million ($2.10 per share) on a top line of $11.7 billion in its fiscal first quarter.

Not only did FDX beat the Street’s expectations of $1.95 per share on $11.48 billion in revenue, the delivery company’s earnings soared by 24% compared to the year-ago quarter. FedEx’s revenues were 6% higher than a year ago, fueled in large part by online shopping.

Additionally, FDX appears likely to meet its full-year earnings guidance of $8.50 to $9 per share. FDX believes that the U.S. economy will continue to grow at about 3% a year in 2014 and 2015 — one big reason for its robust earnings expectations.

That said, here are three reasons FedEx stock is still a buy after its earnings beat:

Growth in All Business Segments

Income from the company’s Express segment surged 35% in the most recent quarter and operating margin got a 130-basis point bump — solid performance from its largest business unit and driven by strong U.S. demand growth.

But FDX is no one-trick pony.

Operating income from FDX’s Ground segment grew by 13% compared to the same quarter last year, driven by increased volume and higher revenue per package. FDX Ground’s U.S. E-commerce sales grew by more than 15% in each of the first two quarters of the year.FDX Freight had bragging rights too — the segment posted a 10.4% operating margin, an increase of 340 basis points since last year.

Restructuring, Cost Savings Are on Track

In 2012, after slogging through the post-Recession muck for several quarters, FDX began a strategic restructuring of its business segments. The plan to realign FedEx’s offerings with the “new normal” in shipping services included a three-year plan to increase profit by $1.7 billion.

FDX is achieving those gains through voluntary buyouts (from October 2012 to May 2014, some 3,600 employees took the voluntary buyouts). Other components of the restructuring plan include reducing network capacity and modernizing its aircraft fleet.

The latter tactic is particularly interesting: Expensive fuel is the bane of transport companies’ existence; fuel costs can amount to 30-40%, and FDX moves a lot of cargo by older, gas-guzzling aircraft. That’s why modernizing the FedEx aircraft fleet is such a high priority. FDX will retire at least 65 aging aircraft between 2014 and 2018, replacing them with 13 Boeing (BA) 757s, 46 wide-body 767F freighters as well as six 777Fs.

FedEx expects to save a whopping $300 million a year on fuel costs once the advanced, fuel-efficient have entered into service, which should provide long-time support for FedEx stock.

Rate Hikes Boost Margins

Effective Jan. 5, 2014, FedEx will raise rates across all three segments — the new price hikes will average 4.9%. Another key margin booster: dimensional weight pricing. FDX plans to price shipments by size as well as weight — potential sticker shock for shoppers who are used to buying bulky, but lightweight goods like electronics that weigh very little.

Archrival UPS is doing the same thing — no wonder Amazon (AMZN) is looking into using drones to deliver small packages fast.  Alas, AMZN’s plan is not yet ready for prime time, but the U.S. Postal Service is trying to win friends (and business) by lowering its package delivery rates. Nevertheless, I don’t expect USPS to seriously threaten the incumbent duopoly’s new pricing scheme.

Bottom Line

FedEx stock is trading at about 15 times forward earnings now: a little better than rival UPS. FedEx offers a scant dividend yield of 0.5% — well behind UPS’ 2.7%. That said, three important elements have helped fuel FedEx’s ascendancy: white-hot E-commerce sales, U.S. shipping volume growth and a heightened focus on reducing operational costs.

FedEx stock has gained 11% year-to-date and has a price-to-earnings-growth ratio of 1.2, indicating that the stock could be slightly overvalued. But with the holiday season fast approaching — and FDX hiring 50,000 additional temporary workers to handle the volume — FedEx stock still looks like a buy.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/fedex-stock-earnings/.

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