Is FedEx Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does FedEx (NYSE: FDX  ) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell FedEx's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at FedEx's key statistics:

FDX Total Return Price Chart

FDX Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

22.4%

Fail

Improving profit margin

3.4%

Pass

Free cash flow growth > Net income growth

1,390% vs. 12.9%

Pass

Improving EPS

30.4%

Pass

Stock growth (+ 15%) < EPS growth

41.8% vs. 30.4%

Fail

Source: YCharts.
*Period begins at end of Q2 (May) 2010.

FDX Return on Equity Chart

FDX Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

15.5%

Pass

Declining debt to equity

23.1%

Fail

Dividend growth > 25%

307.8%

Pass

Free cash flow payout ratio < 50%

13.5%

Pass

Source: YCharts.
*Period begins at end of Q2 (May) 2010.

How we got here and where we're going
FedEx put together a strong performance, earning six out of nine passing grades and narrowly missing seventh due to slightly underwhelming revenue growth since 2010. A massive debt-raising during last year has certainly cost FedEx a debt-to-equity passing grade as well. Let's dig a little deeper to see what FedEx is doing to fix these weaknesses and earn a better score.

Both FedEx and rival UPS (NYSE: UPS  ) are losing high-priced business as international shippers switch from premium next-day air deliveries to two-day or three-day services. UPS Chairman and CEO Scott Davis has said that the shift could be temporary due to a lack of new technology products from Asia, but there's certainly a lot more to the global supply chain than new electronics. FedEx CEO Fred Smith was blunt enough to note that shifting customer preferences are to blame, rather than playing Pollyanna with seasonal trends.

For the 2013 fiscal year, FedEx reported an increase of 3.7% in revenue, but it had problems controlling operating expenses as operating margin fell quite a bit year-over year, from 7.5% in 2012 to 5.8% in 2013. This resulted in a 23% decline in net income to $1.56 billion for the year. One of the measures the company has implemented to cut operating costs is a voluntary employee separation program, in which 3,600 jobs will be cut from the workforce along with a reduction in the operational aircraft fleet. Cutting costs could improve operating margins and help achieve projected EPS growth of 7% to 13% for 2014, but FedEx is a very economically dependent company. If the country isn't buying, FedEx won't be delivering.

In an effort to reduce operating expenses, these two companies might begin exploring self-driving trucks as a new route to greater operational efficiencies. Self-driving trucks can evade regulations regarding the length of trucking shifts, and there's certainly an efficiency argument to be made for eliminating redundant jobs. As a result, FedEx wouldn't have to rely on air transport for as many urgent shipments. Of course, putting thousands out of work will ultimately reduce the demand for packages if the trend ripples across society.

Putting the pieces together
Today, FedEx has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

American markets are reaching new highs, investors and pundits alike are skeptical about future growth, particularly when bellwethers like FedEx are having difficulty growing their bottom lines. But there's reason for optimism. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


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