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.

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.

To that end, although FedEx shares might appear expensive, there's a reason for this -- very seldom do great companies trade below their fair market value. The company's ongoing cost-cutting efforts will continue to boost earnings and fuel more stocks gains like the 11% jump we've witnessed in the past three months.

It also helps that FedEx has never forgotten what matters most to Wall Street, such as delivering a 141% year-over-year jump in earnings in the most recent quarter. On a per-share basis, the surge was even more impressive, jumping by 159%, buoyed by the company buying back roughly 32 million shares of its own stock.

More than anything, it is this sort of confidence in its own future that makes FedEx a strong, long-term play on the global economic recovery. The company would not be buying back its stock if it didn't believe there was value. Management remains confident about 2015 and sees growth accelerating on a year-over-year basis.

As proof that their confidence is not "just for show," FedEx projects 2015 earnings to be as high as $9 per share, which is 17 cents higher than the $8.83 per share Wall Street was projecting, according to Yahoo! Finance. This is what Warren Buffett, who just bought a 9% stake in the company, understands.

FedEx's Express segment, its largest business, has struggled so the flat revenue growth in the recent quarter, as uninspiring as it may appear, was a relative victory. That business has been hampered by lower freight and low fuel surcharges.

The Express business, which is now being carried by strong performances in the Ground and Freight segments (up 8% and 12%, respectively), should rebound. The company projected to grow earrings at a 15% annual rate over the next five years, so there's no better time to bet on this global icon, which continues to bet on itself.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @Richard_WSPB

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


TheStreet Ratings team rates FEDEX CORP as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate FEDEX CORP (FDX) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, revenue growth and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

You can view the full analysis from the report here: FDX Ratings Report

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