Investors who want to cash in on the holiday shopping season might want to think about FedEx ( FDX) as a shipping play, given the company's push into ground delivery.

Over the past year, FedEx has been focusing heavily on its ground-delivery business, at a time when consumers are looking for cheaper alternatives to air service. The emphasis has yielded solid results.

Average daily volume at FedEx Ground for the week ended Nov. 29 surpassed 2.6 million packages, which is 20% above first-quarter levels, said David Westrick, a company spokesman, on Tuesday.

"I think some people might be surprised by the strength at FedEx Ground," said Arthur Hatfield, an analyst at Morgan Keegan. "Up until this year, it had not been a fully developed network."

In October, FedEx said it would spend $1.8 billion on its ground-delivery unit over the next six years. For this holiday season, FedEx will be able to reach all addresses within the U.S. That comes as early returns on online retail sales are up appreciably compared with last year.

In the first quarter, revenue at FedEx Ground rose 33% to $826 million from the year-ago period. But it still came in well below the $3.93 billion in revenue that was generated at FedEx Express.

" UPS ( UPS) still has the majority of the market share in the business," said Hatfield. "But FedEx is taking some of it away."

According to Hatfield, FedEx's market share in the ground-delivery business has been about 16.5% over the past few years. This year, the analyst is expecting it to edge up to about 18.5%. In the meantime, he is forecasting UPS's market share to drop to about 62% this year from 64% in years past.

One of the key issues for FedEx has been low profit margins. The company has had to spend a lot of money on planes. For FedEx, the ground business is likely to be a higher-margin one.

"FedEx has a lot of momentum in its ground business," said Thomas Albrecht, an analyst at BB&T Capital Markets. "That could lower capital expenditures, as it becomes a bigger part of the corporation."

However, FedEx didn't have positive free cash flow in its most recent quarter, unlike its competitor UPS. (FedEx expects to be cash flow positive by the end of the year.) And some say that FedEx, though it trades at a significant discount to UPS, is fairly valued at current levels.

"Given the run-up in the stock price of FedEx, we believe that the shares are closing in on an appropriate valuation," said John Barnes, an analyst at Deutsche Bank Securities, in a recent research note. The analyst maintains a price target on the stock of $55. It closed at $52.53 on Tuesday.

Barnes said his target is based on a price-to-earnings multiple of 18.5, using calendar 2003 earnings estimates of $2.95 a share. That reflects a 20% to 25% discount to an average P/E of 25.5 for UPS.

Other analysts caution that the road to an economic recovery has not been paved yet. "Given the recent weakness in manufacturing numbers, there is probably some concern that these stocks FedEx and UPS are overvalued," said Robert Norfleet, an analyst at Davenport.

Nonetheless, FedEx's progress in its ground business over the holiday season may be worth watching.