Why FedEx Stock Surged 57% in 2013

FedEx stock has soared in the last seven months as investors have become more comfortable with the company's turnaround plan.

Jan 2, 2014 at 10:33AM

It took FedEx (NYSE:FDX) stock a while to get off the ground last year, but by the end of 2013, it had registered an impressive 57% increase. FedEx's strong gains since May indicate that investors are becoming comfortable with its restructuring plans, and that they are excited about the company's stepped-up share repurchase program.

FDX Chart

FedEx 2013 Price Chart, data by YCharts

After this strong 2013 performance, FedEx stock is likely to take a breather in 2014. FedEx now trades for 16 times the average analyst estimate for fiscal year 2015 earnings. While the company has good long-term upside due to the growth of e-commerce and improved efficiency, at this point it no longer seems dramatically undervalued.

The promise of profit
In 2012, the FedEx management team laid out a plan to improve FedEx's stock performance by cutting costs through a combination of headcount reductions, aircraft replacement, and the elimination of unprofitable capacity. The main target of cost cuts was the express division, which specializes in overnight package delivery. Over the years, it had become bloated relative to demand.

Images

FedEx is looking to slash costs dramatically in its express division

It took a little while for the cost cuts to start kicking in. The express division routinely delivered an operating margin around 5% from fiscal year 2010 through fiscal year 2012, but for the fiscal year ending in May, the operating margin fell to 2%.

These recent results have been far short of FedEx's goal of maintaining an operating margin of at least 10% in each of its business segments. However, the express segment started to bounce back in the last two quarters as the early cost cuts start to take hold. The operating margin for the division rose to 3.6% in the August quarter and hit 4.8% in the November quarter (the second quarter of fiscal 2014).

This trend bodes well for FedEx's earnings in the next few years. There are plenty of additional cost cuts to come, which should drive the operating margin of the express segment into the high single digits and boost total company earnings by at least 50%. FedEx probably needs the global economic recovery to gain steam in order to reach the 10% operating margin target.

The big catalyst
While the promise of earnings growth driven by restructuring helped FedEx stock gradually move higher this summer, it took a share buyback announcement to spark a major rally. On Oct. 15, the company announced that it would add 32 million shares (roughly 10% of the total outstanding) to its ongoing share repurchase program.

This announcement signaled management's confidence in FedEx's long-term prospects. It also highlighted the ability of FedEx to buy back stock while also investing heavily in growth and fleet modernization initiatives. Indeed, the company quickly ramped up its buyback program, repurchasing 7.2 million shares of FedEx stock last quarter.

Looking ahead
FedEx's ongoing cost-cutting program should drive earnings growth for the next two to three years, with EPS reaching approximately $10-$12 by 2016. FedEx's ground division also represents a long-term-growth driver, because e-commerce probably has decades of above-market growth ahead of it.

However, after its recent run, FedEx stock already reflects both of these earnings growth opportunities. Unless the global economic recovery suddenly takes off or management finds additional cost savings, FedEx stock is unlikely to significantly outperform the market over the next few years.

The Motley Fool's top stock for 2014
There's a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends FedEx. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers