FedEx: Don't Panic!
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
FedEx (NYSE: FDX) and other package delivery services are important parts of our economy that we take for granted. If you don't use the Post Office to send and receive packages, you probably use FedEx or UPS (NYSE: UPS).
The sound of those iconic trucks zooming around is a common one in every city and town in America and the rest of the world. These two companies are considered economic bellwethers, so FedEx cutting earnings expectations for the next quarter would no doubt cause a lot of consternation among investors. The company's stock price slipped after its announcement.
FedEx announced that the earnings per share would be $1.37 to $1.43 per share, down from the original forecast of $1.45 to $1.60 per share the company released in June. The P/E ratio is 13.70 compared with 21.00 for the whole industry and 18.20 for UPS, so FedEx appears undervalued.
FedEx blamed the weak world economy for the reduction in earnings expectations, as well as fuel costs. This would be the first drop in earnings expectations since November 2009.
As The Hitchhiker's Guide to the Galaxy said, don't panic! Despite these projections, the company is pretty solid. FedEx's profits overall have been growing every year. In its last annual report released in July, the company posted a profit of $2.03 billion, up from $1.45 billion the previous year, an increase of 40 percent. The company's earnings have been growing since 2009, after the economic crisis shook the whole economy.
The company's sales have been steadily climbing, with sales of $11.01 billion in the last quarter. The next earnings release is scheduled for Sept. 18, so we'll see how well the company actually does. The cost of sales, however is about half of that each quarter at $5.38 billion. The sales and COGS have been hovering around that rate for the past year. Capital expenditure, not surprisingly for a company with an extensive worldwide shipping network, is very high at $4 billion, eating up almost all of its $4.8 net cash from operations.
A lot of that cost comes from fuel. They have to keep their planes flying and those trucks moving, of course. FedEx is phasing out its older planes like the Boeing 727 and the MD-10 (retrofitted versions of its long-serving DC-10) in favor of Boeing 767 and 757 freighters, which promise more fuel efficiency.
FedEx's competitor, UPS, isn't doing too badly. The company posted a profit last quarter of $1.1 billion or $1.16 per share. UPS's sales have been healthy, though down slightly this year, with sales of $13.35. billion last quarter. The company's sales are somewhat season, doing the best in December, with sales of $14.17 billion.
The main advantage that both these companies have is their extensive distribution networks spanning the globe. If you have to get something somewhere quickly, one of these two companies is going to do the job.
Forward Air Corp. (NASDAQ: FWRD), by contrast, focuses on the U.S. and Canada. The net income was $47.20 million or $1.67 per share. They get the packages from the plane to the ground using independent owner-operators, so they keep the trucks off the balance sheet.
Air Transport Services Group's (NASDAQ: ATSG) sales come from two main customers, DHL and the U.S. military, as Fool blogger Joshua Bondy pointed out.
Both of these companies will have to be content with smaller markets thanks to the economies of scale UPS and FedEx are able to employ. It would be like trying to start a microchip manufacturing company today and expect to be able to take on Intel or AMD. (The advent of fabless manufacturing, however, is revolutionizing the semiconductor industry, but that's for another blog post.)
Overall, both FedEx and UPS are in excellent financial condition. The mark of a good value investor is that when a good company's stock price dips, when other investors are thinking "Sell!" the value investor is thinking "Sale!"
Fool blogger David Delony 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. 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. If you have questions about this post or the Fool’s blog network, click here for information.
