Deliver this Courier to Your Portfolio

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

A few years back, this company assured its customers of its quick courier services in a fast paced world. It has stood the test of time and become one of the world’s favorite delivery services companies. FedEx (NYSE: FDX) has been serving its customers with high quality and efficient services for a long time now.

For the second quarter of FY 2013, FedEx performed quite well, beating expectations on revenue and narrowly missing the expectations on EPS. Revenue increased by approximately 5% on a GAAP basis to $11.1 billion from the prior-year quarter, whereas EPS decreased by 11% to rest at $1.39. FedEx needs to work on some kind of an expense control program, as the gross margin decreased by 80 basis points from prior-year quarter.

The profit numbers got hit by the Hurricane Sandy. The operating results for both the FedEx Ground and FedEx Express divisions turned out to be pretty good amidst concerns of a consistently weak global economy. FedEx Ground witnessed good performance across the quarter as a result of an increased cyber presence and an upward movement in the overall market share. The e-commerce initiatives, combined with effective pricing and discounting mechanism, contributed to an increase of around 4% in the operating income for the division.

FedEx Express suffered a downturn in the operating numbers owing to a weakening global economy and shifts in consumer preferences to slower but lower-yielding international delivery services. Sandy also played a good role in pushing these numbers further down, as it had already been subjected to a shift in customer base. However, as the management of the company has pointed out, its ongoing cost reduction plans have offset some of the negative impact, and FedEx expected to continue this in the future.

For its biggest competitor, United Parcel Services (NYSE: UPS), things have been going pretty much in the same line as FedEx's. Both of these international delivery giants are now getting a healthy share of the e-commerce market, stemming from the huge increase in online ordering from retail websites. This has worked in favor of both these companies, especially during the Thanksgiving and Christmas season, spiking the volumes of delivery. Also, quite like FedEx, UPS is prone to changes in the fuel costs, which occupies the biggest share in its raw material list. UPS can capitalize on its size and market share in order to have a command over the pricing of fuel.

Whether a stock to keep?                  

FedEx has shown consistent performance throughout the year, except for the fact that its numbers got hit by the wrath of Sandy. The FedEx Ground division suffered a downturn caused due to heavy icing in the wake of Sandy, which resulted in unusual delays and higher fuel costs for normal delivery routines.

As we move forward, the management of the company has provided a diluted EPS estimate of $1.25 to $1.45 per share for the third quarter. This seems to be an achievable goal given the increase in e-commerce business and cost containment initiatives in the ground division. FedEx is currently trading at a P/E of around 14, which is quite lower than its rival UPS', which is around 21. This suggests room for potential growth given the increase in market share and effective pricing strategies. In terms of cash flow, FedEx has shown consistency and positive growth potential.

In addition to these fundamental strengths is the dividends paid out by FedEx over the last few years. Dividend payouts have increased by approximately 21% since 2009, owing to an increase in revenue.

Considering the facts mentioned above, along with a greater extent of certainty that will be achieved in the forthcoming quarters (hopefully, no more super-storms), I would not hesitate in recommending FedEx for inclusion in your portfolio. This delivery services giant is, in my opinion, poised to grow slowly; but as the management has pointed out, it is working towards maximizing shareholder returns by betting on new initiatives and traditional strategies.


MihirMehta has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service, Inc.. 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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