FedEx: Continued Growth, E-Commerce And Cost Savings Pay Off

Jun.18.14 | About: FedEx Corporation (FDX)

Summary

FedEx reports strong earnings driven by economic growth, e-commerce and cost savings.

The company is upbeat about the prospects for 2015.

Yet after 50% momentum over the past year, the good news has been priced in.

FedEx (NYSE:FDX) pleasantly surprised the market on Wednesday reporting solid fourth quarter results which easily beat consensus estimates.

Continued growth and cost cutting efforts will aid the bottom line going forward, driving enthusiasm of investors. However, given the huge momentum and fair valuation ahead, shares offer no compelling value in my opinion.

Fourth Quarter Highlights

FedEx reported fourth quarter revenues of $11.84 billion, which is up 4% compared to last year. Revenues came in way ahead of consensus estimates at $11.66 billion.

Reported net earnings were up by an impressive 141% to $730 million. As a result of share repurchases, earnings per share rose by an even more impressive 159% to $2.46 per share. Earnings came in 10 cents ahead of consensus estimates.

Looking Into The Results

The company's main express unit reported flat revenues which came in at $7.00 billion. Revenue growth was driven by an 8% jump in ground revenues which came in at $3.01 billion, while freight revenues were up by 12% to $1.55 billion. The service segment posted a modest 1% drop in sales to $402 million.

Despite the topline increase in sales, total operating expenses were down by 3%. Salaries and compensation fell by a percent to $4.16 billion while the fuel bill came in unchanged at $1.15 billion.

As a result, operating earnings jumped from just 4.4% to 10.0% of sales. Express reported operating earnings of $475 million compared to a breakeven result last year, making it the big earnings driver on the back of cost savings. Ground earnings rose by 26% to $586 million resulting in very impressive margins. Freight earnings more than tripled to $122 million.

Valuing FedEx

The company ended the quarter with $2.9 billion in cash and equivalents. Total debt including lease obligations came in at $5.5 billion resulting in a modest $2.6 billion net debt position.

For the entire year, FedEx reported revenues of $45.6 billion on which it reported net earnings of $2.1 billion. Trading at $147 per share, equity in the business is valued at $43.5 billion. This values equity at a little less than 1.0 times annual revenues and 20-21 times annual earnings.

FedEx has raised its quarterly dividend by a third to $0.20 per share, providing investors with an 0.5% dividend yield.

Recent Investor Presentation

Back in April, FedEx released a big investor presentation. The company stresses the bundled services including the express business, the ground business, its freight unit and services which operate independently, while being managed together. In this manner, FedEx hopes to get the best of both worlds.

For the long term it aims operating margins to come in above 10%. Note that operating margins came in at exactly 10.0% over the past quarter.

Earnings per share are targeted to grow at 10-15% per annum with improved cash flows targeted to be returned to shareholders. Underlying expected growth is the continued trend of e-commerce growth and globalization. Key for future earnings growth is the continued restructuring plan to improve express earnings by $1.6 billion by 2016.

Takeaway For Investors

The recovery in the economy, continued growth of e-commerce and the fruits of the turnaround plan in its express business are paying off. This is marked by a substantial dividend hike, although the yield remains very modest.

More importantly, for the current year FedEx foresees earnings of $8.50 to $9 per share. This implies that earnings are anticipated to increase toward $2.6 billion, valuing shares at 16-17 times forward earnings. Investors have anticipated this already to a large degree after shares have risen nearly 50% over the past year. Analysts were looking for annual earnings of $8.76 per share.

The company continues to be upbeat about the US and global economy, anticipating an acceleration in growth in 2015 versus 2014. Investors are very pleased with the announcement sending shares a full five percent higher. This is as the second largest transportation firm is still recovering from the harsh winter weather in the US.

That being said, I believe a lot of the good news has already been priced in, limiting appeal of shares at the moment and at current levels. I will keep the company on my radar in order to initiate a position on significant potential pullbacks around $125 per share. For now I remain on the sidelines.

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