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FedEx Preview: Operative Leverage Drives Growth

Stocks in this article: FDX UPS

With expected revenue growth of 13% but expected earnings growth of 39%, FedEx is nearing the sweet spot of the economic cycle, as continued volume growth is a plus, as long as costs can be kept relatively flat. For 2011, the company is expected to generate $38.9 billion in revenue and $5.21 in EPS -- these are current analyst consensus numbers -- for expected growth of 12% and 39%, respectively. The stock is trading at 18x 2011 EPS estimates and 15x 2012 EPS estimates. In addition, FedEx is trading at just about 10x cash from operations, although free cash flow has been negative the last few quarters, thanks to sharply higher capex.

FedEx has a number of positives going for it right now, although the management team is always very conservative in its guidance. We would be stronger buyers of the stock in the mid $80s, but the fundamental story is a compelling one right now.

At the time of publication, Gilmartin was long FedEx and UPS, although positions may change at any time.

Brian Gilmartin, CFA, founded Trinity Asset Management (TAM) in 1995, where he is currently a portfolio manager. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gilmartin appreciates your feedback; click here to send him an email.

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