FDX Income Sinks on Fuel Costs (News) December 16, 1999

FDX Income Sinks on Fuel Costs

By Richard McCaffery (TMF Gibson)
December 16, 1999

FDX Corp. (NYSE: FDX), the parent company of express delivery carrier Federal Express, flew into storm clouds today and emerged unscathed.

The Memphis, Tennessee company reported that net income for its fiscal second quarter dropped 6% to $171 million as higher fuel prices took a $55 million bite out of operating income. Earnings per diluted share came in at $0.57, down from $0.61 a year ago, but the mark exceeded estimates by $0.02 per share.

Since the company warned investors about fuel prices and potentially lower domestic sales growth last quarter, the earnings surprise was enough to bump the stock up more than $2 in early trading.

Still, the transportation sector got slammed by higher fuel costs this year, and largely because of this FDX stock is way off its high of $61 7/8 reached last spring.

Incidentally, investors weary of press releases that force readers to pull numbers from different places to make relevant comparisons, and wade through graphs of murky text for basic information, should check out FDX Corp.'s quarterly release.

Readers know within the first 150 words what happened and exactly how it impacted results. This release is a model of plainspoken, easy-to-read facts. Anyone thinking a company can't shoot it straight, or that investors appreciate shell games, is dead wrong.

Meanwhile, FDX officials said fuel prices could add $200 million in expenses this fiscal year, so the company is reducing capital spending by the same amount. And in an effort to boost domestic package growth, the company is realigning its sales force to better focus on small and midsize companies.

Investors are probably expecting FDX's share price to blossom once fuel prices decline since the company is excellent in so many respects.

Not so fast. In November, investment firm SS Investor initiated coverage on FDX with a "hold" rating because the company isn't generating enough of a return on its invested capital. This basically means that it's making money, but not enough to justify the risk of an investment based on what it costs the company to make a profit in the first place.

It's usually not worth mentioning research reports, but this analysis is compelling because SS doesn't make short-term recommendations, period. It doesn't try to guess where the market's headed, or pick stocks based on momentum, or issue quarter-to-quarter earnings estimates. It simply offers straightforward, fundamental analysis based on a company's intrinsic value. This is Foolishness to the highest degree.

The problem for the average investor (folks like me) is that concepts like return on invested capital and cost of capital aren't easy to grasp, and they're even harder to calculate. It's worth knowing, however, that it's out there, and that there's more driving great stocks like Dell (Nasdaq: DELL) and Coca-Cola (NYSE: KO) than consistent earnings and sales growth -- even though both are important measures.

Keep in mind that none of these concepts have to be learned overnight. Investors have a lifetime to invest and plenty of time to incorporate new concepts along the way. To get started, take a look at this Fool on the Hill column: Creating Wealth.

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