FedEx (NYSE:FDX) was trading up 2.5% in pre-market trading on Wednesday morning, following quarterly earnings and revenue that both beat analyst expectations.
FedEx is one of the world's largest courier/shipping companies and most well-known name brands; it draws annual revenues of $43 billion from numerous services and products under the FedEx name. Aside from shipping, FedEx runs FedEx Office, shipping and copying retail stores that the company acquired when it bought Kinko's in February 2004.
The purpose of this article is going to be to review FedEx's quarterly report, and present an argument as to why I believe FedEx will continue to be a lucrative investment going forward.
Here's how FedEx has fared in its last five quarters of reporting earnings:
|Quarter Ending||Date Reported||Analyst EPS Forecast||EPS Reported||Difference|
FedEx has been a lucrative investment for traders over the last year, yielding 31.1% in the last twelve months and an impressive 14% in the last three months alone.
As you can see, FDX has traded well from a technical standpoint over the last six months, as well. The RSI indication shows that the stock has neither been overbought nor oversold during that time period, and that the sustained uptrend appears to be a healthy one.
For the quarter ending August 2013, FedEx reported profit of $1.53/share ($489 million), up from $1.45/share ($459 million) the year prior. In addition, revenue was $11.02 billion for the quarter, rising 2.1% and beating analyst expectations of $10.97 billion.
Also this morning, FedEx confirmed their forecast for full year earnings growth of 7% to 13% and that they "expected $4 billion in capital spending for fiscal 2014".
FedEx has been following through on the restructuring that it said it was going to put in place last year. It consists mainly of updating their airline fleet and restructuring their express and ground segments.
In addition, FedEx is working on continuing to grow its FedEx Ground segment, a segment that has produced roughly $10 billion in revenue last year. FedEx Ground is a ground delivery service that FedEx started officially in the year 2000. The purpose of FedEx Ground was to expand the company from its well known express routes, and tap into the ground shipping game that United Parcel Service (NYSE:UPS) and the USPS were both dominating. Since then, FedEx has found significant success with FedEx Ground.
FedEx has the ability to ship to and reach over 200 countries worldwide, and international shipping also generates significant revenue for the company; about $9 billion in 2012 alone. In order to continue to grow this segment, FedEx is expanding its processing and storage facilities worldwide.
One primary risk that FedEx faces is the rising cost of oil, as fuel for its trucks and airliners make up a significant amount of cost that the company has to bear. The company uses over 700 planes and tens of thousands of trucks, according a report by NPR. The company has considerable resources that use fossil fuels, and as crude continues to rise - as it's expected to do through 2014 - it could present a challenge for FedEx.
However, it was reported by NPR that FedEx's CEO, Fred Smith, is acutely focused on trying to find solutions to the petroleum barrier:
Few business leaders are more focused on finding alternatives to petroleum-based fuels than FedEx CEO Fred Smith.
Shortly after Smith founded Federal Express, the 1973 Arab oil embargo almost killed it. The experience imprinted Smith with a keen interest in the price and availability of oil.
"That would be an understatement," Smith laughs. "For sure."
FedEx now burns 1.5 billion gallons a year of petroleum-based fuels, and, once again, the potential for conflict in the Middle East, specifically with Iran, has boosted prices and raised fears of a supply disruption. Smith says keeping the supply of imported oil flowing has cost the U.S. dearly over the past 40 years.
"We spend about $70 [billion] to $80 billion a year as a country doing that, not just for ourselves, but for the rest of the world as a whole," Smith says. "And that's even before we get to the $1.3 trillion we've spent on Afghanistan and Iraq, and as Alan Greenspan, the former chairman of the Federal Reserve, said pretty plainly, 'Iraq was about oil.' Not totally, but ... so these are very big issues."
Smith, a former Marine, has tried to address those issues, advocating strategies for the country through his seat on the Energy Security Leadership Council, a group of CEOs and retired generals and admirals. He has also developed a corporate plan to reduce the use of petroleum at FedEx. It includes three strategies - one for its light vehicle delivery vans, another for its heavy trucks and a third for its planes.
Smith's plan includes betting on hybrid and electric vehicles, as well as adding biofuels and natural gas to the mix. This type of forward thinking is going to be crucial for FedEx to address costs going forward, and I'm excited that FedEx has started looking at solutions in 2012/2013 and not waiting until it becomes a significant problem for the company.
FedEx is a great buy now, because it's easily the quickest growing company, when compared to UPS and the USPS - it's two main competitors. In addition, FDX's stock price has appreciated every year dating back to 2001, generally at a rate of about 5% or above each year. Competitors like UPS and DHL (OTCPK:DPSTF) have found inconsistent growth - in UPS' cases a rough period between 2007 and 2010, and in DHL's case, continual decline since the early 2000's.
As I stated in my last article about Ford (NYSE:F), dividends are just lovely. They're like little security blankets for investors that choose to place their money in certain equities. Dividends in the market remain the best loyalty program companies have implemented since casinos started handing out vats of whiskey, buffet tickets & free rooms simply for handing over your hard earned money directly to them.
As FedEx continues to grow, their dividend is growing with it. Although not competitive with the dividends of competitors like UPS, yet, the consistent raise shows that FedEx is doing the right thing for shareholders and continuing to make their stock appealing to potential investors.
It has been years of significant and rapid growth for FedEx, all based from their one original segment - its express services. The name "FedEx", like "Google" is so synonymous with express mailing, people say they're simply "going to FedEx something" the way people now say they're "going to Google it".
One of the things that I look for in any company is a non-saturated market that is ripe for the expansion. Two companies I've written about this year - Natural Gas Services (NYSE:NGS) and Kona Grill (NASDAQ:KONA) were attractive to me due to the amount of expansion potential they had.
FedEx has this same opportunity as they continue to penetrate into the ground shipping market - still dominated primarily by UPS and USPS. There has even been speculation that as the USPS downsizes, they may begin to privatize certain segments; this has led to extremely speculative, yet not out of the question, theories about a FedEx/USPS partnership.
"FedEx Express remains focused on reducing costs while facing challenging global economic conditions," Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer, said in a statement. "Meanwhile, FedEx Ground continues to generate strong profitability on growing customer demand for its services."
Combining ground with the amount of expansion that FedEx could take on internationally - namely by adding infrastructure overseas in China and other countries - and FedEx still clearly has a lot of room to grow. In conjunction with these factors, the company's forward thinking and the safety blanket of a dividend, FedEx is very likely to continue to deliver for investors going forward. As always, best of luck to all investors.
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.