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Shares of FedEx (FDX) rose over 5% in Wednesday's trading session, in a general downbeat market. The global transportation company announced an ambitious program to significantly boost future profits.

Profit Target Program

FedEx unveiled programs which target to achieve a $1.7 billion improvement in annual profitability improvements during the next three years. The most significant portion of the benefits will be achieved in the fiscal year of 2016. The estimates, exclude the ongoing improvements at FedEx Ground and FedEx Freight.

At the same time, the company announced the retirement of David F. Rebholz, which has been president of FedEx Ground.

Cost reduction initiatives are already underway and improved information-technology will be a main reason by which FedEx will be able to meet its cost reduction goals. Costs will be reduced in selling, general and administrative expenses, particularly in FedEx Services and FedEx Express.

Chairman and CEO Frederick W. Smith commented on the program, "A significant portion of the profitability improvement will come from cost reductions at FedEx Express and FedEx Services. The profit improvement initiatives, along with the combined strength of FedEx Ground and FedEx Freight, would put FedEx on track to achieving its financial goals."

Outlook

FedEx reaffirms its full year earnings outlook for its fiscal 2013. The company expects to earn $6.20-$6.60 per diluted share for the full year. Second quarter earnings are expected to come in between $1.30-$1.45 per diluted share.

Again CEO Smith, "We are confident that we will deliver the performance to ensure the near- and long-term success of FedEx. And we believe we can do this even in low-growth environments for global trade and within the major economies."

Valuation

FedEx ended its first quarter of its fiscal 2013 with $2.7 billion in cash and equivalents. The company operates with $2.4 billion in short and long term debt, for a modest net cash position.

FedEx generated annual revenues of $42.7 billion for 2012, and most likely revenues will grow at a very modest pace in 2013. Full year earnings for its fiscal 2013, are expected to come in around $6.40 per diluted share.

After Wednesday's gains of 5%, the market values FedEx at roughly $28.2 billion. This values the operating assets of the firm at $28 billion. As such, the market values FedEx at 0.6 times annual revenues and 14 times 2013s expected annual earnings.

Currently, FedEx pays a quarterly dividend of $0.14, for an annual dividend yield of 0.6%.

Investment Thesis

Year to date, shares of FedEx have risen some 7%. Shares quickly advanced to levels around $97 in February and fell back to lows of $84 in recent weeks. Shares fell on the back of weak first quarter earnings which were accompanied by a soft second quarter outlook. The problems at the company express division are putting pressure on shares. Shares rallied back to $90 at the moment, on the back of the ambitious profit improvement plan.

Over the past five years, shares of FedEx have lost some 15%. Shares fell to lows of $40 in the beginning of 2009, and recovered to $100 in 2011. While FedEx's share price has been under pressure over the past years, the company has boosted its annual revenues from $35.5 billion in 2009 to $42.7 billion in 2012. Net income rose from $98 million to $2.0 billion over the same time period.

Wednesday's announcement came as a positive surprise to investors and analysts. The company unveiled to improve profits by $1.7 billion through the fiscal year of 2016. FedEx has merely three and a half years time to achieve these savings, implying annual cost savings of $500 million. In comparison, analysts from J.P. Morgan expected the company to guide for a profit plan of $400-$500 million.

Assuming normal tax rates, the planned cost savings imply additional earnings per share of at least $1.00 per diluted share. Excluding organic growth, this implies annual earnings exceeding $7.50 by 2016. Investors are furthermore comforted by comments of CEO Smith, who says FedEx aims to increase future dividends. At the moment, the company pays a yield of a mere 0.6%.

Investors were applauding FedEx's initiatives on Wednesday. The profit initiatives give a clear guidance for future earnings, which are expected to rise on the back of the significant cost savings. Besides earnings improvements, investors are also pleased with announcement of future dividend hikes.

Shares of FedEx trade at a significant discount compared to its main competitors [[UPS]]. While the valuation has become much more appealing on a stand-alone basis, on the back of the initiatives, I am hesitant to take an outright long position. Investors who have a lower risk tolerance could set up the relative spread in the transportation industry by going long FedEx and short UPS.

Source: FedEx - Investors Are Applauding The Massive Cost Saving Program And Future Dividend Hikes