The Price of Being FedEx

FedEx (NYSE:FDX), a Motley Fool Stock Advisor recommendation, has been a great company and a great stock for quite some time. If you were lucky enough to pick up FedEx shares back in the mid-'90s, you're already sitting on some very hefty gains. The question for the rest of us, of course, is whether the company is apt to deliver similar performance in the future.

There's a lot to like in the company's fiscal second-quarter report. Revenue rose 10%, operating margin expanded again, net income climbed 33%, and the company surpassed analyst estimates. Putting a cherry atop it all, the company raised guidance for the remainder of the year (though the midpoint of management's guidance isn't too different from the existing average estimate).

Digging a bit into the meat of it, performance was pretty balanced across the transportation businesses. Express shipping saw double-digit revenue growth and high single-digit volume growth, while the ground and freight businesses saw double-digit top-line growth on mid-single-digit volume growth. Kinko's was again the problem child, though; revenue was up just 1%, and operating income was down sharply.

The one concern that I have about this company, though, is its basic cost of doing business. It takes a lot of money to keep this business going, which limits FedEx's ability to generate cash flow. That also impairs the company's ability to produce a higher return on invested capital (ROIC), and I can't help but note that one of the company's biggest rivals, UPS (NYSE:UPS), has a much higher ROIC.

The good news, though, is that capital investments (as a percentage of revenue) have been generally trending lower for a while now. What's more, the company has a stated commitment to improving ROIC and cash flow. I 'm willing to give management the benefit of the doubt regarding their ability to keep generating sufficient returns on these investments.

While FedEx still has the opportunity to gain share in transportation and expand further into logistics, it remains something of a proxy for the economy. A better economy means more cargo zipping around, a slower economy means less. However, those large capital investments form a barrier to entry for possible competitors, which makes it hard for me to imagine that FedEx can't continue to grow its business over time.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).