FedEx Delivers Value, With or Without Ackman

NEW YORK (TheStreet) -- Shares of FedEx (FDX) closed Tuesday at $103.15, up 4.4% after rising more than 7% at one point on speculation Bill Ackman, hedge fund manager of Pershing Square, was looking to make a sizable investment in the shipping giant.

It has not been confirmed that Ackman is interested in FedEx, but a Reuters report detailed an investment worth as much as $1 billion that may be going somewhere.

With past successes including McDonald's ( MCD) and Proctor & Gamble ( PG), Ackman has an excellent record of picking winners. In the case of FedEx, investors are looking to skate to where they think the puck may be going next.

From my vantage point, though, FedEx was a buy with or without Ackman, even though investors were sour on FedEx's fourth-quarter results. The Street didn't believe it was good enough, sending the stock down 8%, which also yielded several downgrades.

As I've discussed recently, it was an overreaction. The company is going through a period of transition. I'm not going to make excuses for weak profits or try to pretend that shipping volumes have not been an issue. But the company needed time to allow management to execute its plan.

Contrary to what many analysts believe, there were very few surprises in the report. The company's freight business has struggled for some time, with the express and ground businesses picking up the slack. This quarter was no different. Nor did management pretend that it was an excellent quarter.

The company posted revenue of $11.4 billion, representing 4% year-over-year growth and broadly in line with Street estimates. As has been a recurring theme, shipping volume was once again on the light side -- as average daily shipments fell 1% year-over-year in the U.S. But the company was able to offset this with a 3% increase in international export volumes.

Segment-wise, I believe that FedEx did what it had to do -- even though many disagree. Both the ground business and express business were up, 12% and 3% respectively. This made up for the 1% decline in freight. Was this a concern? I believe it was. But I don't believe that this is a situation where FedEx is losing ground to competitors.

I'll talk about this more in a couple of weeks as we'll have a better viewpoint when UPS ( UPS) reports results for its second quarter. But just from looking at UPS' April quarter, freight grew just 1%, while profits were down $23 million. Likewise, I don't believe it's accurate to suggest that FedEx is being outperformed by YRC Worldwide ( YRCW), which also saw 4.5% revenue decline in its freight business in its May quarter.

In terms of profitability, FedEx delivered. Adjusted earnings-per-share advanced 7% year over year to $2.13, which was enough to beat expectations. I don't believe that the Street has given management enough credit growing free cash flow (FCF) by close to 60% due to aggressive cost controls. While I've once criticized this company for not producing enough FCF, this time management delivered.

Accordingly, I'm willing to excuse the 41% drop in operating income, which included several one-time charges related to the continuing restructuring. While a profit decline of 41% is nothing to sneeze at, let's not also discount that the adjusted numbers revealed improved margins and double-digit growth in income. Here again, this shows that the Street is not assessing FedEx's total performance relative to its restructuring plans.

I'm not by any means making excuses for this company. But as I've said recently, analysts' expectations remain too high. While management is battling sentiment to keep those expectations in check, FedEx's long-term commitment to better performance shouldn't be overlooked.

Let's not also forget that aside from internal reorganization projects, there are also global economic challenges that are outside of management's control. As noted, FedEx is not the only company that is experiencing weak shipping volumes. With that in mind, I believe that investors should remain patient and allow management to execute its long-term strategy and produce value. But regardless of what the Street may believe, it's not going to be an "overnight" delivery.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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