3 Reasons FedEx Corporation's Stock Could Rise

After enduring a "lost decade," FedEx Corporation (NYSE: FDX  ) shares have finally regained their momentum in the last two years. FedEx stock has rocketed from less than $90 in late 2012 to more than $150 today.

FDX Chart

FedEx Corporation Stock: 10-year price chart, data by YCharts.

Despite this rapid rise, there is still more upside for FedEx stock in the years ahead. The FedEx Ground operation continues to gain market share, and the long-term growth of e-commerce will drive its continued growth. Meanwhile, FedEx's cost-cutting initiatives are finally hitting their stride, boosting profit margins. Lastly, as the global economy recovers, FedEx will be one of the prime beneficiaries.

The rise of e-commerce

E-commerce is growing at a tremendous rate, as consumers embrace the convenience and low prices of online retail. In the U.S., e-commerce is expected to grow from $263 billion in 2013 to $414 billion in 2018, according to Forrester Research. Even then, it will represent just 11% of total retail sales, providing plenty of long-term upside.

Obviously, e-commerce retailers need to get packages from their own warehouses to customers' doorsteps. FedEx Ground is one of the major avenues for doing so (along with UPS Ground and the Post Office).

The growth of e-commerce has helped FedEx Ground grow its revenue from $7.4 billion in its 2010 fiscal year to $11.6 billion in the recently ended 2014 fiscal year. That represents a 12% compound annual growth rate, making the Ground segment the fastest-growing piece of FedEx.

The rise of e-commerce has driven rapid growth at FedEx Ground.

It's also FedEx's most profitable division. Last year, FedEx Ground delivered a full-year operating margin of 16.8%, whereas the much larger Express division posted an operating margin of just 4.3%. The long-term growth of FedEx Ground, powered by e-commerce growth, will significantly enhance FedEx's profitability.

Cost-cutting hits its stride

While e-commerce represents a huge growth opportunity for FedEx Ground, cost-cutting represents the most important driver of profit growth for FedEx Express. Between May 2013 and May 2014, FedEx implemented significant staffing reductions, primarily through an early retirement program. This reduced fixed costs at FedEx Express.

Going forward, a second cost-cutting program will be even more important. In 2012 and 2013, FedEx made a strategic decision to shrink the fleet of jets used in its Express operations. It is retiring dozens of older, fuel-guzzling aircraft -- primarily A310s and MD-10s -- ahead of schedule.

FedEx is retiring older, fuel-guzzling planes like this one.

Some of these aircraft will not be replaced at all. The FedEx jet fleet will shrink by 13 aircraft in the next two years (or nearly 4%). Additionally, where FedEx is replacing older planes, it is doing so with smaller jets that offer lower trip costs.

FedEx can make do with significantly less air freight capacity because many of its customers are choosing cheaper "deferred" delivery options. For these packages, it is more cost-effective for FedEx to contract out to other airlines (particularly passenger carriers) with extra cargo space, rather than carrying the cargo in its own jets.

Global economic recovery

The third major factor that could boost FedEx stock in the coming years is a return to faster global economic growth. In a recent investor presentation, FedEx's management pointed out that trade growth almost always outpaces global GDP growth.

One of the main factors that kept FedEx stock down during the past decade was the impact of the Great Recession and the slow pace of the subsequent recovery. FedEx aggravated its woes by reacting too slowly to changes in the economic environment. It delayed cutting costs, expecting a quick recovery.

FedEx has finally addressed its fixed cost structure. When the global economy recovers, FedEx will be well-positioned to leverage its fixed assets and thereby grow its profit margin.

Today, FedEx management believes the global economic recovery is strengthening. The company projects that global GDP growth will accelerate from 2.2% in 2013 to 2.6% in 2014 and 3.1% in 2015.

Of course, FedEx executives were overly bullish a few years ago, so these projections could be wrong. However, one thing is certain. At some point -- probably not too far down the road -- the global economy will pick up steam. When it does, FedEx will benefit from rising volumes and improved pricing power.

Foolish bottom line

FedEx expects EPS to reach $8.50-$9 in its current fiscal year. That is equivalent to a 26%-33% year-over-year gain. FedEx's ongoing aircraft fleet restructuring and the growth of FedEx Ground should drive strong EPS growth for a few more years, too.

Longer term, FedEx is likely to be one of the biggest beneficiaries of a resurgence in global economic growth (whenever that occurs). As a result, FedEx stock could continue to rise despite surging about 70% in the last two years.

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  • Report this Comment On October 09, 2014, at 7:24 PM, notme2012 wrote:

    I think the recent decision by 9th Circuit Court of Appeals, declaring that FedEx Ground drivers in Californian and Oregon to be employees and not contractors, a big downside for FedEx. FedEx wants that court to rehear the case "en banc". But considering that the 9th Circuit is the most progressive Appeals Court, I doubt that the decision will change. Which will force FedEx to appeal to the US Supreme Court. Many experts are speculating that SCOTUS will not take the case, based on the belief that SCOTUS doesn't take many labor cases and the case is mostly about just 2 states decisions (not national). FedEx Ground would be forced to change its business plan again. Buying out the Independent Service Providers, at perhaps a significant cost, and/or multiple lawsuits could have a big effect on FedEx earnings.

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Adam Levine-Weinberg

Adam Levine-Weinberg is a senior Industrials/Consumer Goods specialist with The Motley Fool. He is an avid stock-market watcher and a value investor at heart. He primarily covers airline, auto, retail, and tech stocks. Follow him on Twitter for the latest news and commentary on the airline industry!

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