How FedEx Delivers Long-Term Gains Despite a Pricey Stock

NEW YORK (TheStreet) -- Since hitting a intraday low of $138.30 on June 17, shares of global transportation giant FedEx (FDX)  have delivered more than 11% gains to investors in three months.

The company has convinced a jittery market that FedEx's position as a global leader can remain intact despite global economic weakness, which has hampered its Express segment.

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With shares now at around $154, up 7% for the year to date, and trading at trailing price-to-earnings ratio of almost 30, FedEx shares aren't cheap. Not only is FedEx's P/E seven points higher than the industry average, according to Yahoo! Finance, shares of rival UPS (UPS) trade at a multiple that is eight points lower. UPS, despite being larger by market cap ($89 billion vs. $43 billion), is outgrowing FedEx in revenue by more than 2%.

Even so, FedEx can still deliver the goods. Patient investors can be gainfully rewarded with gains of more than 20% in the next 12 to 18 months. Assuming the company can grow revenue at a rate of 2% to 4% next year, the stock should reach $190, helped by gross margin expansion and ongoing share buybacks.

Are FedEx shares are really "expensive?" 

Based on next year's earnings estimates of $10.66, according to Yahoo! Finance, these shares are only trading at a 14 multiple. By contrast, UPS is trading at a multiple of 17. Not to mention, FedEx operates at a gross margin that is 6% higher than the industry average and 5% higher than UPS.

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