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Why FedEx Stock Surged 57% in 2013

Adam Levine-Weinberg
January 2, 2014

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.

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 operatin