Recs

10

Not All's Fine at FedEx

By Rich Smith | More Articles
June 23, 2011 | Comments (4)

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So FedEx (NYSE: FDX  ) beat earnings. Big deal.

Fools, I don't mean to belittle FedEx's accomplishments in a year that was obviously rough for anyone who uses -- you know -- fuel. While today's surprise decision by the International Energy Agency to unleash 60 million barrels of crude upon a price-shocked market has given a reprieve to heavy users like Delta (NYSE: DAL  ) and United Continental (NYSE: UAL  ) -- sending their shares up 4% and 5%, respectively -- as recently as April the picture looked a lot different. Year over year, April 2011 jetfuel prices had risen 31%, putting the pinch on everyone involved in moving people (and packages) through the air.

This crimped profits at FedEx in particular, making the company's fiscal 2011 turnaround just that much more impressive:

  • Sales up 13% versus fiscal 2010.
  • Operating profit up 19%.
  • Net income up 23%, with adjusted per-share profits rising 30% to $4.90.

And the fact that FedEx now tells us it's going to grow earnings another 35% in fiscal 2012, to $6.60 per share in profit? Great news -- but still not good enough to get me to buy the stock.

Call me a skeptic, call me a Fool, but no matter how good the headlines read, when I get a copy of FedEx's earnings in hand, I always head straight to the cash flow statement to see how the business is really doing. Sadly, the news here is not good. Despite reporting $1.45 billion in profit last year, FedEx showed a mere $607 million in actual free cash flow generated for the period. At today's prices, therefore, a share of FedEx will set you back about 48 years' worth of actual cash profit -- and it gets worse.

Last year, FedEx laid out $3.4 billion on capital expenditures (the bulk of which went to "aircraft and related equipment"). This year, management promises to spend $4.2 billion on capital expenditures -- a 24% increase. Boeing (NYSE: BA  ) will probably applaud the extra spending on airplanes. I do not.

Foolish takeaway
Make no mistake: FedEx is an admirable enterprise. Alongside UPS (NYSE: UPS  ) , it's one-half of a global duopoly on fast transport. It's even better than UPS in one respect, that being its nearly clean balance sheet (versus UPS' $6.7 billion net debt). But with analysts predicting 16% long-term earnings growth, I just don't see the sense in paying 48 times free cash flow, or even 22 times earnings for FedEx.

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Fool contributor Rich Smith does not own, or short, any stock named above. The Motley Fool, however, owns shares of United Parcel Service and FedEx, and Motley Fool newsletter services have recommended buying shares of FedEx. The Motley Fool has a disclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 23, 2011, at 4:02 PM, PSU69 wrote:

    One reason why I gave this article a rec is fuel volatility will remain an factor. BRIC consumption growth is undeniable, demand will continue to climb and we have supply issues a-many. I use FedEx, they buy my brakes, I love the folks who helped me succeed with the supply side, yet I can not buy the stock.

  • Report this Comment On June 23, 2011, at 5:54 PM, Cane07 wrote:

    I do own the stock. And yet, Rich's article is right on. This is the one stock in my portfolio that I sit on and think to myself, "I should really sell it". Because no matter how much marketshare FedEx and UPS eat up, there will always be another company willing to take on the global duopoly.

    Anybody can get into this business. But, nobody can be able to build a large enough moat to dictate prices. And that, in an environment of high fuel prices, will be any transport provider's biggest problem.

  • Report this Comment On June 24, 2011, at 9:04 AM, RobertT11 wrote:

    I also own the stock, but I actually listened to the quarterly/year end fiscal earnings call. If the people who wrote these articles would actually do the same, they would be in a better position to give advice. Capital spending is going up because the company is taking advantage of the tax relief act of 2010, thus being able to depreciate new capital purchases 100%. So why not ramp up spending?! Makes PERFECT business sense. Looking strictly at 1 item of the filings (cash balance) is like looking only at the tires of a new car before buying it. You need to consider everything before actually purchasing the vehicle.

  • Report this Comment On June 24, 2011, at 11:29 AM, ldkoehler wrote:

    FedEx is one of New Constructs' Most Dangerous Stocks for June. (Disclosure - I'm an analyst at New Constructs)

    Sure, FedEx beat estimates with it's accounting earnings, but its cash flows and real economic earnings have been negative for the last 3 years and declining for the last 4. I'll follow the cash. It's a red flag for me when a company's reported earning are positive and increasing while its economic earnings are negative and getting worse.

    Assuming FDX can improve it's operating margins by 19% and keep them there, I'm seeing 41 years of future cash flows already baked into the price. FDX might be able to achieve those operating margins in the near future - they have in the past (thru 2008) - but 41 years is a very long time in such a competitive space. And like I said above, they've been on the decline for 4 years.

    More info on accounting vs. economic earnings: http://blog.newconstructs.com/2010/08/05/economic-versus-acc...

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