FedEx Corp. (NYSE:FDX) provides transportation, e-commerce, and business services in the United States and internationally. Most basically, it provides shipping services, either priority or non-priority, for all types of business needs. It burns a lot of fuel doing this. In the twelve months ended May 31, 2014, its FedEx Express business spent $3.943B on fuel. Its FedEx Freight segment spent $0.595B on fuel. Its Ground segment spent only $0.017B on fuel. The total is a whopping $4.555B on fuel for fiscal year 2014. The total operating expenses for those three segments was $41.049B. Fuel amounts to about 11% of the total.
Since late June 2014, WTI oil prices have fallen from roughly $108/barrel to below $64/barrel during the day on December 1, 2014. That is an approximately 41% drop, and the fall may not be completely over, although oil did bounce upward later on December 1, 2014. FedEx does not hedge on fuel. Instead, it has a system of fuel surcharges to offset higher fuel prices. The current fuel surcharge of 6% is based on the average monthly fuel cost in October. It will be in effect until Jan. 4, 2015. One would presume that the previous 3-month surcharge was based on the average monthly fuel cost in July 2014. The average WTI crude price in July was probably above $100/barrel. October probably averaged about $85/barrel for WTI crude. The above are just ballpark figures from a quick look at a chart.
All this means that FedEx should garner considerable monies from fuel surcharges that are probably inappropriate due to actually much lower fuel costs for both Q2 2015 (September - November 2014) and Q3 2015. One might posit that the actual lower fuel costs would amount to an approximate 15% in fuel savings for fiscal Q2 and possibly Q3 2015. Remember that fuel was only about 11% of operating costs in FY2014. That means a 6% surcharge translates into about a 54% purely fuel surcharge, if one only considers direct fuel costs. Of course, this last is over simplistic. Still FedEx will not only be saving considerably on the fuel, it will be gleaning extra monies from the fuel surtax far above the actual fuel costs.
A ballpark 15% savings on fuel costs in Q2 2015 will amount to about $171 million in savings for the quarter. For fiscal Q1 2015, FDX had operating income of $987 million. If one ballparks $1B in operating income for Q2 2015 (and it will likely be higher due to the Christmas season), then an approximately $171 million more due to fuel savings would add about 17% to Q2 2015's operating earnings. This is not something to sneeze at.
I am sure there will be many expenses found to make this number much less, but even a relatively unexpected 10% increase in operating earnings for Q2 2015 should make FDX nicely outperform its Q2 2015 guidance. One could probably use the same logic for Q3 2015. FDX should definitely benefit. It should exceed guidance. Recently, it has forecast a great 8.8% year over year Christmas season increase in volume. This should make it exceed prior guidance even further. That in turn seems likely to cause the stock price to rise.
Few investors get down into the nuts and bolts of the earnings. They only concern themselves with the headlines. That means FDX is probably a great bet for a Christmas rally. Of course, it has also been a top performing company, so it's not a bad company to invest in longer term. If investors choose to do this, they will want to watch out for an economic downturn. There is mounting evidence that one might be coming soon. If investors see one coming, they will probably want to exit FDX. It is a cyclical stock after all.
The end of Q1 2015 FDX guidance called for FY2015 EPS of $8.50 to $9.00 per share. This incorporated an increase in shipping rates by an average of 4.9% for US Domestic, US Export, and US Import services. This will still likely take place. FDX manages its fuel costs via the surcharges. These should work more in FDX's favor for both Q2 and Q3. That should mean that FDX will reach the high end of its guidance, or it may possibly exceed its guidance by as much as $300+ million, if it was already planning to meet the high end of its guidance (or exceed it). This is the typical good management strategy of under promising and over delivering, and FDX has good management.
In general, FDX has been doing well even without the above. In Q1 2015, it saw revenues of $11.7B. These were up 6% year over year from $11.0B. Operating income was $987 million. This was up 24% from $795 million in the year ago quarter. Operating margin was 8.5%. This was up from 7.2% in the year ago quarter. Net Income was $606 million. This was up 24% from $489 million in the year earlier quarter.
FDX in Q1 2015 finished is recent share stock buyback program with the purchase of 5.3 million shares. One would presume that some of those monies would then be more evidently available in Q2 2015. That should make the company look more flush, at least until FDX institutes a new stock buyback program.
FDX is putting old airplanes out of service, and it is replacing them with new ones over time. The US new 767 program for this year constitutes 16 new planes. Each one is expected to save the company $10 million per year in costs. Four were already in service by mid September 2014. The other twelve are expected to be delivered by the end of fiscal year 2015. FDX should also benefit in fiscal 2015 from a voluntary buyout program (for employees) that was completed in May 2014. I could go on, but the real point is that FDX management is performing well. FDX is a near-term buy, but it has also been a good longer-term hold. No recent events would make one change one's opinion on that score. Cheaper oil prices should improve its outlook considerably. They may even help US businesses, which would in turn help FDX. The October 2014 statistics for Chicago's O'Hare airport and Houston's George Bush International airport show freight increases of 14.7% and 16.8% respectively year over year. This data bodes well for FDX's business.
The two-year chart of FDX provides some technical direction for this trade/investment.
The chart above shows an uptrend of more than two years duration. The company management seems to have been doing a great job. There do not seem to be any fundamental reasons that FDX should reverse course now. One could argue that FDX is a bit overpriced. However, this consistent grower probably deserves to sell at a premium. It has a P/E of 24.31 of and an FPE of 16.29. The average analyst's forecast for EPS growth for fiscal year 2015 is 33.80% and for fiscal year 2016 is 20.80%. The average analyst's five-year EPS Growth estimate per annum is 15.34%. FDX pays a 0.40% dividend.
With the above numbers FDX can easily justify its valuation. Further the stock has appreciated more than 100% in the last two years. With the current oil price fall, FDX appears to be just that much more of a buy. However, investors should keep in mind that it is a cyclical stock. It fell from about $111 per share to about $43 per share as the Great Recession started. It would likely fall again if the US sees another such downturn. Investors will want to sell if they see this happening. For the present US economic conditions seem sound enough. However, the EU and many other world areas are troubled, and FDX is an international business.
Investors can trade into FDX for a possible oil price mediated rise for the next few months. Such a rise will likely be helped along by the QE from the BOJ, the QE from the ECB, and the Carry Trades on both the Yen and the Euro. All of these things should provide a lot of excess liquidity. Some of this will likely make its way into the US stock markets, especially since the USD has been strengthening. Then the foreigners will earn both appreciation on the USD and appreciation on US stocks, or at least they will hope to. If that wasn't enough motivation, the US is also viewed as a safe haven in troubled times. The US stock markets may continue to go up, especially after the ECB makes definite its plans for a new €1 Trillion in QE. This extra liquidity would benefit FDX's stock price, and it would benefit FDX's business by buoying EU businesses. If you are worried about a near-term downturn, you might want to average in, but FDX does look like a good buy. The average analyst agrees with this with a recommendation of 2.1 (a buy).
NOTE: Some of the above fundamental fiscal data is from Yahoo Finance.
Good Luck Trading/Investing.
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.