Is FedEx the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if FedEx (NYSE: FDX  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at FedEx.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 3.8% fail
  1-Year Revenue Growth > 12% 7.9% fail
Margins Gross Margin > 35% 25.4% fail
  Net Margin > 15% 3.8% fail
Balance Sheet Debt to Equity < 50% 13.5% pass
  Current Ratio > 1.3 1.55 pass
Opportunities Return on Equity > 15% 9.9% fail
Valuation Normalized P/E < 20 21.36 fail
Dividends Current Yield > 2% 0.5% fail
  5-Year Dividend Growth > 10% 8.9% fail
       
  Total Score   2 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

FedEx's score of 2 leaves a lot to be desired. But given how reliant FedEx is on the health of the entire economy to support its shipping business, it's not terribly surprising that the recent recession has put a damper on its growth and financial results.

But a turnaround may be coming. In its most recent quarterly report yesterday, FedEx said that labor costs and rising fuel prices caused earnings to miss analyst estimates. Nevertheless, the company raised guidance for its full-year earnings to between $5 and $5.30 per share. That's consistent with what rival UPS (NYSE: UPS  ) is seeing in the coming quarters, as it also increased its estimates of future earnings back in October.

In fact, the shipping industry in general seems to be enjoying a comeback. Trucking companies Heartland Express (Nasdaq: HTLD  ) and Knight Transportation (NYSE: KNX  ) have seen growth in volume and revenue, and lagging performance from YRC Worldwide (Nasdaq: YRCW  ) increasingly appears to be company-specific.

Shipping is generally a low-margin business, so FedEx isn't likely to get all the way to a perfect 10, no matter how much the economy recovers. But if a true recovery accelerates, it will certainly help the transportation company regain its status among the elite stocks in the market.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add FedEx to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. FedEx is a Motley Fool Stock Advisor recommendation. United Parcel Service is a Motley Fool Income Investor recommendation. The Fool owns shares of FedEx and United Parcel Service. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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  • Report this Comment On December 24, 2010, at 3:12 AM, elliotriley wrote:

    I think FedEx will rebound a lot over the coming years as the economy picks up. My favorite thing about this stock is that it's also got a lot of international exposure. I'm in the US Navy and work as a Supply Officer on a ship out of Sasebo, Japan. Let me tell you, I've been to Bangladesh, India, Thailand, Cambodia, Malaysia, and a bunch of other countries in Pacific and when we needed critical parts shipped... it could only be FedEx in many (if not most) instances. This means that not only is FedEx going to be doing better in the states, but I've seen firsthand how FedEx is getting into emerging markets. Not bad in the long run, I think.

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