FedEx Earnings Wednesday - Why It's A Buy

| About: FedEx Corporation (FDX)

On Wednesday, FedEx Corp (NYSE:FDX) will announce their fiscal Q3 earnings. FDX is a best-in-class investment and while it's not a huge growth story, it's the best way to play a recovering US economy and the continued rise of e-commerce at the same time.

Missing estimates has made the stock cheap

Over the last 6 quarters, FDX has grown earnings inconsistently. However, the company has been consistent in one area: beating street expectations. The company beat projections every quarter since 2011 until last quarter, when it missed on restructuring costs.

Period Estimate Actual Variance Previous Year
Q2 2013 $ 1.41 $ 1.39 -0.02 $ 1.57
Q1 2013 $ 1.40 $ 1.45 0.05 $ 1.46
Q4 2012 $ 1.92 $ 1.99 0.07 $ 1.75
Q3 2012 $ 1.35 $ 1.55 0.20 $ 0.81
Q2 2012 $ 1.52 $ 1.57 0.05 $ 1.16
Q1 2012 $ 1.45 $ 1.46 0.01 $ 1.20
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Due to this underperformance, the company trades at a sharp discount to its major competitor, UPS. A large part of the variance is due to restructuring FedEx Express, which was announced last fall.

Operational wins will lead to rising earnings and multiples

But FDX continues to beat UPS operationally. FDX's year-over-year growth is currently running almost double that of UPS. (numbers from Yahoo)

Ticker MrktCap RevGrowth Gross Margins EBITDA Op Margins PS
FDX 34.3B 5% 25% 5.45B 7% 0.79
UPS 81.49B 3% 14% 3.18B 2% 1.51
Industry - - 16% - 5% 0.47
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The company's gross margin and EBITDA are currently running 70 percent greater than its larger competitor. And the company's operating margin over the last year was better than the market average, despite legacy issues around FedEx Express.

The company is taking market share at an opportune time: oil prices are hitting recent lows which makes shipping more profitable. And e-commerce continues to see double digit growth.

Low expectations give the company a spring for growth

Analyst consensus is looking for $1.39 in earnings per share, down 10% from last year. The stock is currently trading at a price-to-sales about half of UPS, despite much better operational ratios.

There are some risks though - Europe's impact on the macro story could be a problem if it really starts to hinder trade. And restructuring could be more complex than anticipated in a company that handles such complex logistical chains. But with middling expectations to begin with, there's much more upside than downside with FDX.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.