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FedEx Is Still a Buy After a Solid Quarter

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FedEx (NYSE: FDX  ) shares' nearly 3% jump since the company's Tuesday earnings announcement raises a question or two. Are those who sat on the sidelines too late to invest? And how does FedEx stack up against $75 billion UPS (NYSE: UPS  ) as an investment opportunity, particularly after the recent earnings news? To find out, let's break down FedEx's latest fiscal year and quarterly results and look more closely at what's on tap for the coming year. 

The specs
The FedEx earnings announcement was followed by banner headlines proclaiming things like "FedEx Earnings Disappoint." To their credit, investors shrugged off the negativity and dug a bit deeper into the numbers, and the stock subsequently rose. While the bottom-line numbers for fiscal 2012's fourth quarter of $1.73 in earnings per share were indeed ho-hum and could have been viewed as disappointing, they were only part of the story. FedEx has begun the process of retiring some older planes, and that has affected earnings going forward and will continue to do so -- at least from a bean-counter's perspective.

Remove the $134 million aircraft impairment charge taken to account for the retirement of 24 planes and 43 engines, and suddenly the share-price jump makes perfect sense. Both quarter-over-quarter and fiscal year-over-year results were stellar, particularly when investors take into account the relatively uneven economic conditions over the past year. Revenue rose to $11 billion, versus $10.6 billion in 2011, because of growth in each of the three primary FedEx business lines. Ground-segment revenues were up 9%, freight rose 7%, and express grew 6%. Not too shabby. But that's not even the fun part. The most impressive of all, especially for those of us on the FedEx bandwagon these past few months, was the 11.5% jump in operating income, primarily the result of improving margins.

Going forward
Though not all investors may be on board with the FedEx management team's designs on growing internationally through acquisition, they should be. They're not necessarily huge by either volume or purchase prices, but the recent string of buyouts spans the globe. In the past month and a half alone, FedEx has announced acquisitions in France, Brazil, and Poland.

Fiscal 2012 ended with a bang for FedEx, and the bump in share price reflects it -- and that's just as it should be. However, somewhat lost in the hoopla of the past couple of days was what could be construed as a slightly sobering commentary from CFO Alan Graf: "We face certain cost increases in fiscal 2013. These headwinds include higher employee-related costs, including higher pension expenses of approximately $150 million due to a historically low discount rate on our May 31, 2012, measurement date, as well as higher depreciation costs."

Addressing overhead
The company's answer to cost concerns is to continue the push for expense controls in an effort to maintain, and perhaps even grow, what are already sound margins. More specifics on what the company intends to do toward its cost-cutting efforts are expected in the fall. Surprisingly lower fuel prices should help minimize expenses, too, at least for fiscal Q1.

Let's just say, for argument's sake, that the earnings guidance for 2013 falls somewhere in the middle of the $6.90-to-$7.40 a share range that Graf recently shared. Assuming earnings of $7.15 per share for fiscal 2013, FedEx is currently trading at just under 12.8 times 2013 expected earnings, below what is already an extremely good value at today's 14.36 P/E, versus 22.2 for the industry as a whole.

Head-to-head comparison
FedEx's primary competitor is, of course, industry leader UPS. At more than $75 billion, UPS stands head and shoulders above the rest, at least by size. As for the better investment option, though, FedEx is more than holding its own, by virtually every measure -- earnings multiples, price-to-book, price-to-sales, and the aforementioned margins.

For the yield-hungry investor, FedEx is not going to be your cup of tea. The recent $0.01 increase bumped the yield all the way up to 0.6%. UPS, in contrast, pays shareholders a dividend of just under 3%.

Are you sitting on the conservative, don't-really-need-too-much-growth side of the fence? UPS should serve you well with its consistent dividend and a touch of growth potential as the global economy eventually shakes off the doldrums. But for the midterm growth-oriented investor, I think FedEx clearly offers the better upside, and the good news is you still have time to get in.

If, as FedEx and its recent international buying spree suggest, you're on board with the notion that American companies can be successful in high-growth emerging markets, you'll find more options to take advantage of these areas with huge potential in our special free report "3 American Companies Set to Dominate the World."

Fool contributor Tim Brugger currently holds no securities positions, including any mentioned in this article. Motley Fool newsletter services have recommended buying shares of FedEx. The Motley Fool has a disclosure policy.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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