FedEx: Do Not Stress The PR Slip

Dec.21.11 | About: FedEx Corporation (FDX)

If you have not seen the video of a FedEx (NYSE:FDX) employee tossing a computer monitor over the fence of the customer who ordered it, you should have a look here. This video has gone viral so to speak all over the internet. Needless to say, this has been a bit of an egg on the face of FedEx. That being said, this slip (the intensity of which is still to be determined) should not impact the way that the stock is viewed.

Why It Does Not Matter

Sure, a viral video showing an employee doing something so careless with a customer's package is never a good thing. This is particularly true since the company's truck bearing its logo is clearly visible in the background of the video. That being said, this video is not going to cause a long-term problem for the company. A quick apology is probably all that will be required by FedEx.

For one thing, Fedex has around 222,000 full-time employees on its payroll. The fact that one employee did something so irresponsible is somewhat to be expected with numbers of that size. It is likely that the employee will be unemployed in the near future if he isn't already. Before you know it, the PR slip is behind FedEx and the company can move forward.

Image Aware Company

FedEx, like so many other companies is well aware of its image. It works to make sure that customers have a positive view of its service. Considering competition from UPS and the Postal Service, it is important that FedEx maintains a great relationship with its customers. In this business, image can matter almost as much as pricing. Word of mouth on which service is best can make a big difference in terms of which company is selected by the average individual.

In the latest 10-K for FedEx the company mentioned its reputation and the value of its brand as important factors to continued growth. Damage to that reputation is cited as a potential risk factor. There is little doubt then that the powers that be at FedEx will do whatever they can to maintain a strong corporate image for the company. Anyone who might consider avoiding the stock based on worries that this incident could bring down the stock should probably reconsider.

Why Fedex Could Be A Big Winner

FedEx (FDX) could end up being a big winner for investors willing to look past these momentary news stories. It currently trades at $83.81 as of the close of trading on December 20, 2011. This is in comparison with expected earnings of $7.40 for next year and an expected per-year growth rate of 16.33% for the next five years. This is for a company that has a history of beating earnings estimates and a market cap north of $26 billion. If fair value is determined to be the earnings multiplied by the expected earnings growth each year, then it is easy to see why FDX could be ready to explode.

Fedex Estimates By The Numbers
2012 EPS: $7.40 Fair Value: $111 Assumed PE: 15
2013 EPS: $8.61 Fair Value: $129.15 Assumed PE: 15
2014 EPS: $10.01 Fair Value: $150.15 Assumed PE: 15
Click to enlarge

These numbers are figuring in the expected 16.33% growth. This could be a little aggressive since these numbers are applying the 16.33% directly to the EPS, which is not likely. Some of that number will be eroded by increased costs and other factors. That being said, there is likely to be plenty of growth in EPS over the years. It also figures an increase in PE to 15, which can be difficult to find in this market, but it is still conservative in comparison with the growth in earnings. Some will disagree with these numbers and that is perfectly fine, but they show that the company does have plenty of potential.

Even more conservative estimates by analysts put the target price for FDX at an average of $99.48 a share in the next 12 months. The high target is $115, so the scenario above is not entirely out of the question. Considering all of this, some odd news story today should not be a factor in determining if a purchase in FDX is a good idea or not.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.