Inside Wall Street: FedEx is an urgent buy

The world's largest express carrier and cargo shipper is a global bet on an economic snapback.

By Gene Marcial Apr 17, 2012 1:36PM

Investors still pondering which stocks to own as the U.S. economy recovers should snap up shares of FedEx (FDX), which moves businesses around the globe in more than 220 countries.

 

The urgency in buying FedEx's shares is that they are still undervalued, trading at $80 a share, off from their 52-week high of $98.66, because of misguided doubts among some skeptics that the company's prospects don't look so promising because management has been circumspect in predicting a more robust outlook for next year. Part of the reason is some uncertainty about business growth in Europe.

 

But the concern is exaggerated. "The company remains well positioned to benefit from global improvement an increased e-commerce activity," says Nate Brochmann, an analyst at investment bank William Blair, who notes that given the fragmented nature of the European package delivery market, "investors' fears regarding FedEx's position within Europe appear overblown."

 

"We believe company fundamentals remain solid and shares at current levels represent an attractive buying opportunity for investors," Brochmann argues. He rates the stock as "outperform," with a 12-month target of $110 a share.

 

True, FedEx's operating margin and return on invested capital are lower when compared with those of its chief rival, UPS (UPS), but FedEx can narrow the gap, Brochmann says, because of favorable pricing trends and a shift in its business mix toward the higher-margin ground business, where FedEx is the second-largest small-package delivery provider in North America.


The solid growth in FedEx Ground services is driven in part by the e-commerce that continues to take share away from traditional retailers, as e-commerce accounted for 8.6% of total retail sales in 2011, up from 7.6% in 2010, notes the analyst.

 

For fiscal 2012 ending May 31, Brochmann estimates FedEx revenue will climb by 9%, to $42.8 billion, and earnings will jump 32%, to $6.51 a share, which is within management's forecast of $6.35 to $60 a share. For 2012, Brochmann expects revenue growth of 7%, to $45.6 billion, with earnings leaping 14%, to $7.41 a share.

 

Analyst David G. Ross of the investment firm Stifel Nicolaus has a higher 12-month price target of $117 a share, based on 14 times his earnings estimate for 2014 of $9.39 a share, up from his previous forecast of $8.80 a share. For 2013, his estimated earnings are $7.50 and $6.45 for 2012. Ross likes FedEx's expansion moves in Europe through small acquisitions of package-delivery companies, such as Opek in Poland this year and similar deals elsewhere last year, including acquisitions in India and Mexico.

 

"FedEx should have a much easier time growing with smaller, less risky integrations," argues Ross, who reiterates his "buy" recommendation "as pricing remains strong, international package volumes resuming growth year over year in the next quarter or two, and e-commerce business-to-consumer helping drive more package volume through its networks."      

 

But the biggest bull of all on FedEx is S&P Capital IQ's analyst Jim Corridore, who sees its stock rocketing to $128 a share in a year, based largely on its earnings for fiscal 2013 benefiting from price increases, operating margin expansion and improved network efficiencies.

 

FedEx should also gain from efforts to ship products with more profitable modes, Corridore says. "FedEx is protected from fuel price swings by a fuel surcharge," he notes, partly offsetting the risk from high oil prices. And, he points out, FedEx shares will see expansion in its price-earnings multiples on signs the U.S. economy is improving. And economists of all stripes agree that the U.S. economy has started to ramp up. 

Gene Marcial


Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

 

 

Tags: FDX
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