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Despite Disappointing Short-Term Results, FedEx Is Leading the Way

- By Omar Venerio

Expansion and cost advantage

As a leader in global express delivery, FedEx Corp. (FDX) continues to focus on growth opportunities outside the U.S. The company is keeping pace with the rapid rate of expansion into developing markets like China. Another advantage is the fact volumes provide a cost advantage over new competitors. On the other hand, FedEx operates in a highly capital-intensive industry. For example, air freighter replenishment will need heavy capital expenditures in the next several years.

Dividends and new contracts

Last month, the company's board of directors approved a dividend increase to 40 cents per share. The dividend yield is 0.73%. Dividends have been paid since 2002 and are consistently increased every year.

The company announced its FedEx Express subsidiary made a new deal with United States Postal Service regarding conditions for the express air transportation contract. The contract's maturity was extended to September 2024. The modifications are expected to generate revenue of about $1.5 billion per year for FedEx Express.

Earnings and revenues

Second-quarter 2017 adjusted earnings per share of $2.8 missed the market consensus by 10 cents and revenue of $14.9 billion also missed estimates by $20 million. Earnings guidance for 2017 is $11.85 to $12.35 per diluted share.

Valuation and price performance

Regarding valuation, the company trades with a trailing price-earnings ratio of 28.3 times, trading at a premium compared to the industry mean of 16.63 times.

The stock is relatively overvalued when compared to Deutsche Post AG (DPW), which trades with a P/E of 16.5, but undervalued compared to United Parcel Service Inc. (UPS), which trades with a P/E of 27.3.

In the graph below, we can see the evolution of the stock price and EPS. The price and EPS show an interesting upward trend in the last five years. A long position of $10,000 made five years ago would have gained an annual return of 18% per year to $22,074.

Final comments

We believe recovery and growth in real GDP, industrial production and consumer spending will occur not only in the U.S. but worldwide. FedEx needs to improve fuel efficiency and charge higher rates to expand margins and improve profitability. Recently, Raymond James Financial (RJF) upgraded the stock from Market Perform to Outperform.

During fourth-quarter 2016, guru Ken Fisher (Trades, Portfolio) purchased 1,148 shares, establishing a postion. Spiros Segalas (Trades, Portfolio) established a 1,430,975-share stake during that same period.

Disclosure: Author holds no position in any stocks mentioned.

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This article first appeared on GuruFocus.