Every Cloud has a Silver Lining
Sharmistha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There is concern over the recent significant underperformance within the Transport Sector. Transport stocks, despite retreating fuel prices, have been on a bumpy road for weeks. The sector is typically seen as a leading indicator for the broader equities market. It features prominently in the Dow Theory, one of the oldest market timing tools out there.
The economic bellwethers FedEx (NYSE: FDX) and United Parcel Service (NYSE: UPS) are encountering temporary headwinds because of the weak economy. The gloomy macroeconomic forecast by FedEx Corp by cutting yearly profit estimates and expectations have dropped the shares of both the companies and temporary bearish sentiment is arising out of this gloom.
Is there a real cause to worry?
The negative sentiment on FedEx can be offset by encouraging housing data. With a profit margin of 4.72% and a reported total revenue of $10,792 million against $10,521 million a year ago, FedEx reported fiscal fourth quarter adjusted earnings of $1.99 per share outpacing the Zacks estimate of $1.92.The outperformance was attributable to strong yields, record holiday shipping and remarkable performance by FedEx Ground. The company has an annualized growth of (3.9%). In spite of a 5 percent decline in total shipments, there is a 6 per cent per package growth a sign that greater efficiencies are already taking hold and the delivery giant is en route to future growth. If there is an economic rebound the company is well positioned to capitalize on the demand and will be an important brand name to watch.
FedEx also is opening scores of new stations in promising markets, such as China, Brazil, and Eastern Europe as part of an organic expansion plan. China presents the most exciting opportunities. FedEx’s management estimates that the delivery market in China will grow by a whopping 400 percent from now until 2020, when it generates annual revenue of $26 billion. FedEx could represent a great play for any investor expecting economic recovery to begin to take hold. The improved revenue, margins, earnings and cash flow in fiscal 2013 reflects an opportunity for long-term growth. The company has a market cap of $26.715 billion and a P/E ratio of 13.21.
UPS has seen its share price drop 3%, and 3.1% recently. It has suffered in the wake of the negative guidance issued by FDX management but the annual sales growth for the past five years cannot be ignored. It expects to grow earnings by 14% next year and 11% over the next five and should be able to maintain its 5-year dividend growth rate of 6.3%. With a payout ratio of 54%, and expected long-term growth in double digits, UPS has travelled a long way. Along the way, patient investors who are willing to wait on the economic recovery will be rewarded with profitable annual dividend. Standard & Poor's Ratings Services characterized the company's business risk as "excellent," its financial risk as "intermediate," and its liquidity as "strong." The company’s plans to continue making significant shareholder rewards while pursuing large acquisitions. With the establishment of a vast and reliable global transportation infrastructure, the company has demonstrated a pattern of positive earnings per share growth over the past two years. Currently there are 11 analysts that rate United Parcel Service a buy.
A close competitor, Forward Air Corporation (NASDAQ: FWRD) is a high-service-level contractor to the air cargo industry providing time-definite ground transportation services through a network of 84 terminals located on or near major airports in the United States and Canada. With a market cap at $1.07B and most recent closing price at $36.58 the company offers both dividend income and the real possibility of capital gains. Dividend yield of 1.12% and a payout ratio of 15.52%, the company is poised towards growth. An increase in net earnings owing to a generation of $22.5 million of revenue is reflected in the company’s records. EPS growth of 12.0% shows the current downward trend is at a crossroads and has possibly ended. With a sales figure of $569 the company’s finances look secure. The net current assets are $129.6 million and the data looks promising. It has a long term EPS growth of 49.0% making the trustworthiness factor strong.
Patience yields results
So do we really have a cause to worry? The financial strengths of these stalwarts definitely indicate a strong reliability and the recent mild storm will only take things further in the positive direction. I have my strong belief that this is the right time to invest and wait for the fruits of investment to unfold, and trust me the day is not long away. I feel the strengths outweigh the weaknesses and these companies will be poised to take advantage of any sign of economic recovery. With the stock prices consolidating, the patience will yield lucrative results.
SharmisthaB 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.If you have questions about this post or the Fool’s blog network, click here for information.