3 Reasons FedEx Corporation's Stock Could Rise

FedEx Corporation stock has surged since late 2012, but there may be more upside ahead.

Sep 4, 2014 at 5:33PM

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.

Shipping Fedex Ground Trucks Fdx

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.

Shipping Airline Fedex Fdx Md

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.

You can't afford to miss this
"Made in China" -- an all too familiar phrase. But not for much longer: There's a radical new technology out there, one that's already being employed by the U.S. Air Force, BMW and even Nike. Respected publications like The Economist have compared this disruptive invention to the steam engine and the printing press; Business Insider calls it "the next trillion dollar industry." Watch The Motley Fool's shocking video presentation to learn about the next great wave of technological innovation, one that will bring an end to "Made In China" for good. Click here!

Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers