This Delivery Giant Still Looks Cheap

Matthew 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) is a leader in guaranteed time delivery for both domestic and international package delivery, the demand for which has skyrocketed lately.  With the growing number of consumers doing their shopping online, FedEx’s revenue has nearly doubled over the past decade.  Although their stock is currently trading towards the high-end of its historic valuation at 17 times earnings, I think this is still a bargain, due to both the strong earnings growth projected, as well as the strength of the company itself.

About FedEx

FedEx provides time-definite delivery services in more than 220 countries, as well as freight transportation and customized logistics for their customers.  FedEx bought Kinko’s for $2.4 billion in 2004, which allowed the company to provide business services at over 1,200 locations that were subsequently renamed FedEx Office.

The company has a network of 52,400 ground vehicles, 660 airplanes, and 58,400 drop-off boxes, which makes it the world’s largest provider of guaranteed express delivery services.  Their general strategy is to ensure that their business is running as efficiently as possible, while at the same time expanding their global reach.  For example, FedEx has the authority to operate 30 weekly flights into China, the most of any U.S.-based carrier.  To further highlight the company’s potential for overseas growth, consider that less than half (48%) of their revenue currently come from international operations.

Competition and alternatives

As far as delivery services go, FedEx’s main competitors are United Parcel Service (NYSE: UPS) and the United States Postal Service, as well as other government and independent delivery services around the world.  UPS is the world’s largest express and package delivery company, and is much more of a domestic company, with only 22% of revenue coming from international package deliveries.  UPS delivers 15.8 million packages per day, or just over 4 billion per year. 

One of my favorite aspects of UPS as an investment is its track record of increasing its dividend (currently at 3%, much more than the 0.5% yield of FedEx).  UPS also has a very nice buyback program, and since 2009 has reduced the number of outstanding shares by 6.7%.

There are also a number of ETF’s that allow investors to get exposure to the entire transportation index, with my favorite being the iShares Dow Jones Transportation Average Index Fund (NYSEMKT: IYT).  This is actually my favorite way to play the sector as a stable long-term investment, and also get some income with a dividend yield of about 1%.

The fund’s top holdings indeed include the two package giants mentioned here, with FedEx making up 8.43% of the fund’s holdings and UPS accounting for 7.24%.  The fund also gives exposure to other areas of the transportation sector, such as rail transportation through Union Pacific and Norfolk Southern, as well as ground transportation through holdings such as J.B. Hunt Transport Services.

Valuation

As mentioned before, FedEx trades at a somewhat premium valuation of 17 times TTM earnings.  Fed Ex is expected to post earnings of $6.35 per share for the current fiscal year, and this number is expected to grow to $7.84 and $9.25 in fiscal years 2014 and 2015, respectively.  This would translate to earnings growth of 23.5% and 18%, which would make the P/E ratio seem extremely low if all goes well. 

For comparison’s sake, UPS trades at a slightly higher valuation of 18.3 times TTM earnings, and is expected to earn $5.01 for fiscal year 2013, growing to $5.71 and $6.37 over the next two years, for a forward growth rate of 13% on average.  However, for those investors who want to rely on their stock portfolio for income, UPS is the clear winner here, given the fact that its dividend yield is 6 times that of FedEx.

Conclusion

So, on the surface, FedEx seems to be more attractively valued, and could indeed produce the better returns for investors if the consensus estimates are accurate.  However, bear in mind that FedEx is more dependent on foreign economies, particularly Europe.  This added risk and instability is perhaps the cause for the seemingly discounted valuation.  At any rate, I still see FedEx as a relatively safe investment whose global reach and efficient operations should make it a winner for decades to come. 


KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends 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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