Has FedEx Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide if FedEx (NYSE: FDX  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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%

3.6%

Fail

 

1-year revenue growth > 12%

5.2%

Fail

Margins

Gross margin > 35%

25.3%

Fail

 

Net margin > 15%

4.5%

Fail

Balance sheet

Debt to equity < 50%

14.4%

Pass

 

Current ratio > 1.3

1.90

Pass

Opportunities

Return on equity > 15%

12.5%

Fail

Valuation

Normalized P/E < 20

16.18

Pass

Dividends

Current yield > 2%

0.6%

Fail

 

5-year dividend growth > 10%

7.1%

Fail

       
 

Total score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at FedEx last year, the company has held onto the point it gained from 2011 to 2012. The stock hasn't moved very quickly, though, rising between 5% and 10% over the past year.

FedEx and UPS (NYSE: UPS  ) have done an effective job of creating what amounts to a duopoly in the U.S. shipping business. Although the Postal Service has done its best to compete, the two leaders have become huge players in the shipping opportunities that the rise of e-commerce has brought to the industry. UPS has a bigger share of the business right now, but given the failure of UPS's buyout of Europe's TNT Express, FedEx has a chance to hit its rival while it's down.

Yet FedEx has had to face some business obstacles. In its most recent quarter, the company saw profits drop 12%, falling short of expectations because of the impact of Hurricane Sandy as well as global economic sluggishness. Moreover, with guidance also a bit weaker than analysts had hoped, it's clear that the global recovery isn't proceeding as fast as FedEx would like.

One interesting part of the business that doesn't get much attention from investors is the FedEx Office segment. The former Kinko's business has been a thorn in the side of office-supply retailers Staples (NASDAQ: SPLS  ) and Office Depot (NASDAQ: ODP  ) , both of which rely on high-margin printing services to drive traffic and revenue. For FedEx, FedEx Office also provides an incentive for printing customers to use its shipping services.

For FedEx to improve, it needs to work on bolstering growth and getting its dividend up in line with the higher yields that UPS produces. If it can succeed at that, then FedEx has the potential to get closer to perfection in the years ahead.

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.

Don't settle for less than the best stocks. Motley Fool co-founder David Gardner has crushed the market by using his insight to pick companies with disruptive potential and invest in them early on. Find out more about David's winning process by taking a personal tour of his Supernova service, available for a limited time by clicking here.

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


Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2205576, ~/Articles/ArticleHandler.aspx, 12/19/2014 3:17:38 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement