Why FedEx Is a Buy Ahead of Earnings
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’ve always like FedEx’s (NYSE: FDX) business. However, I have not been able to fall in love with the stock. Despite the fact that rival UPS (NYSE: UPS) trades at a much higher multiple, I have always found the latter to present the better value. Despite having a solid business, I have been unimpressed with FedEx’s ability to generate sufficient free cash flow.
Although the company is doing a decent job managing operations through a tough macro environment, the degree to which free cash flow would need to arrive to make the stock attractive has not been there. On the other hand, UPS has not shown this to be an impossible task – particularly in periods of weakness when revenue streams rely on global transportation.
However, for FedEx the opportunity for growth is certainly there. The company only needs to execute. Unfortunately, execution, particularly with FedEx ground, has been discouraging as evident by its Q1 report. Investors have begun to doubt whether FedEx is still the market’s logistical standard.
However, the company appears committed to a restructuring plan and shift in strategy - one where management is looking for ways to reduce costs while improving asset consumption. That its Express segment, its largest division in terms of revenue, continues to struggle should be a concern for investors. But all of this can change on Wednesday after the company reports its fiscal second-quarter 2013 earnings results.
What to Expect in Q2
Overall, analysts seem bullish on FedEx despite the expected dip in profits. The Street is looking for earnings of $1.40 per share, which would represent a year-over-year decline of 11%. Over the past three months consensus estimates have been reduced from $1.67 per share.
For the full fiscal year, analysts are expecting earnings of $6.40 per share. For the quarter, revenue is projected to arrive at $10.84 billion, or 2.4% higher year-over-year with full fiscal year sales to arrive at $43.96 billion. Although profitability has been an issue, sales have not, as the company has seen increasing revenue for two consecutive quarters – including a 2.6% year-over-year increase to $10.79 billion in Q1.
Less than 3% revenue growth is nothing to write home about. However, when compared to UPS, which reported both EPS and revenue that failed to meet analysts’ expectations, including sales declines of 0.7%, FedEx’s numbers seem considerably better. Also, UPS’s net income for Q3 of $469 million represented a 56.3% decline year-over year. From the standpoint of comparison, FedEx seems to be doing fine.
Nonetheless, investors will want to see considerable improvement in the company’s various segments, including the Express segment, which arrived unimpressive in the first-quarter due to challenges overseas. However, it was exceptionally disappointing that FedEx's U.S. domestic package volumes showed such a drastic drop in volume.
Will the company address this on Wednesday? Likewise, the market will look for signs that FedEx is able to reverse its recent declines in operating margins and operating income – particularly with the latter, which dropped almost 30% in the Q1.
For a company the size of FedEx, the stock would be much more attractive if the company had a better ratio on return on capital. Nonetheless, at current levels the stock has a considerable amount of value. What’s more, I think investors should consider it encouraging that the company’s management understands what lies ahead and has laid the groundwork for a recovery. At $92 per share, with bad news already baked in, suggesting minimal downside risk, I think this is a good bet to make.
rsaintvilus has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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!