FedEx (FDX) is a global provider of time-sensitive package and freight delivery services serving the delivery needs of individuals and businesses in over 220 countries. With over 54,000 delivery vehicles, 660 aircraft, and over 58,000 drop-off boxes, FedEx is the second-largest global package delivery service in the world. FedEx operates four primary business segments which are FedEx Express, FedEx Ground, FedEx Freight and FedEx Office.
FedEx Express accounts for 62% of FedEx's total revenues and this business segment's revenues are an almost even mix of Domestic (United States) and International business (52% and 48% respectively). FedEx Express is the world leader in guaranteed time of delivery freight, package, and document delivery services. Guaranteed time services include overnight, same-day, and deferred delivery of freight, packages and documents. One important aspect of FedEx Express' international business is its operations in China. With 30 weekly flights into China and a delivery network covering over 400 Chinese cities, FedEx has greater access to the Chinese market than any other United States-based air-delivery service.
FedEx Ground comprises about 21% of FedEx's total revenues and is North America's second-largest ground-based package delivery service. Holding second position makes FedEx Ground the United Parcel Service's (UPS) major competitor in the North American market. This segment is undergoing an overhaul/expansion, which will expand its operational capabilities and enhance its operational efficiencies to move a larger volume of packages and do it in record time. These increased capabilities/efficiencies will allow FedEx Ground to move an additional 5 million packages per day.
FedEx Freight is responsible for about 12% of FedEx's total revenues. Services provided through this segment are less-than-truckload freight and regional freight services throughout the United States. FedEx Office accounts for about 5% of FedEx's total revenues and was once known as FedEx Kinko's. FedEx Office provides services such as copying, packaging, mailboxes and shipping services. This segment competes with UPS Stores and office supply stores such as Staples (SPLS) and Office Depot (ODP).
Recently, FedEx initiated a profit improvement program. Most of the benefit of this program is expected to occur in 2015 and should give FedEx an additional $1.7 billion in operating profits per year by 2016. Some important aspects of the profit improvement program are investments in technology to better schedule routes for aircraft and ground delivery vehicles and better computer modeling of its extremely complex network of delivery assets to better determine pricing for delivery services. As part of the program, FedEx will retire less efficient aircraft and redesign air routes to maximize the efficiency of its fleet of aircraft.
We believe that FedEx, through its FedEx Ground business, will increase its penetration into home delivery services continuing the trend of increasing its market share in the United States. In our opinion, as the global economy improves, FedEx will be a major beneficiary as larger package volumes delivered through its highly efficient operation will generate increased marginal profit margins. Also, a recent 5.9% general rate increase should help drive profits in the near term. We expect FedEx to have a bright future and apparently analysts agree as they estimate that FedEx will earn $6.08/share in 2013 and $7.55/share in 2014.
We believe that FedEx is a good buy for the following reasons:
- FedEx is selling at a reasonable forward earnings multiple of 15.7 times 2013 projected earnings.
- FedEx has a PEG ratio of 1.25, a Price-to-Sales ratio of 0.7, and a Price-to-Book ratio of 1.90.
- FedEx has a solid balance sheet with $3.37 billion in cash.
- Oppenheimer recently initiated coverage of the stock with an Outperform rating and a 12-month price target of $124.00/share.
- S&P has a Strong Buy rating on the stock (5 out of 5 stars) and a 12-month price target of $129.00/share which is 33.9% above today's price.
Disclaimer: Ulfberht Capital is not an investment advisor. This article is not a recommendation to buy or sell securities. Always consult your investment advisor before making any investment decision.