What FedEx May Have in Store for Us

Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

FedEx’s (NYSE: FDX) earnings results are usually a microcosm of the broader economic climate. Its November-quarter release should be no different. Analysts are looking for share net of $1.41, versus the prior-year’s $1.52 tally. Changes in the price of fuel also play a part in its performance, as does the mix between economy and priority service revenues. In any case, the results could point to a more favorable trend in shipping demand than had been anticipated and an enjoyable holiday season for U.S. businesses. Of course this depends somewhat on the pending fiscal cliff and how international markets are holding up, as well.

A Global Focus

Over the past several years, FedEx has expanded its fleet of aircraft utilized for cargo deliveries between the U.S. and Asia, primarily China. In fact, it built its International Priority (IP) operation into a major growth engine. That said, of late, volumes on those routes have stalled, as customers opt for lower-cost economy offerings and management is taking measures to cut expenses. Overall Express segment revenue ascended only 1% in the August (first) quarter, partly due to reduced yields (revenue per package) on international shipments. Positively, though, FedEx has instituted rate hikes for next year averaging 3.9% in Express.

Acquisitions have helped FedEx to bolster its presence in certain areas of the world, such as Mexico. This year, it purchased a Brazilian transporter with about $500 million in annualized revenues, in addition to TATEX, a French shipping firm. The moves have increased its exposure to currency fluctuations a bit. But, we believe it will continue to seek a broadened foothold in Latin America and the Caribbean, among other regions, over time.

Luckily, the Ground business has alleviated the impact of softness in Express, albeit partly due to its lower-cost alternative factor. The unit is realizing higher volumes and rates. Plus, the SmartPost home delivery product is growing by leaps and bounds. Also, the Freight segment, on the heels of its recent restructuring is posting much improved profitability.

Gearing up for the Long Haul

Since the last earnings report, FedEx has announced plans for streamlining activities to run through 2016. If GDP begins to grow faster than the current 2% or so, the plans should allow for a boon to FDX’s bottom line. Management is paying particular attention to the Express and Services segments. Still, as the global exporting continues to rise, it will probably also further upgrade the fleet, and capitalize on the trend. Thus, it ought to compete effectively with United Parcel Service (NYSE: UPS). By the way, UPS’s international business has struggled to advance this year. Still, thanks to the strength of its more extensive domestic ground business, UPS has grown its earnings in 2012 and is heading toward a significant earnings gain for the year. UPS shares, incidentally, are trading moderately below their 52-week apex, and offer upside potential. 

On that note, ground-based transportation companies, such as airport-to-airport provider, Forward Air (NASDAQ: FWRD), may be beneficiaries of the trade down to economy shipping, too. It, also, is on pace for a profit gain this year behind increased volumes and pricing. Greater utilization of its Complete (pick-up and delivery service) offering has helped, too. FWRD stock, thus, may appeal to momentum-based accounts.  

So, how will FedEx’s profits compare with its sluggish fiscal 2012 in 2013 and where will the stock go? Any upward earnings momentum ought to spur investors to buy. Nevertheless, their long hauls prospects appear to be bright and most would likely see decent capital appreciation under a buy and hold strategy.

dctotal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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