I recently wrote about FedEx (NYSE: FDX) doubling its third-quarter profits. Sure, the company has been performing well, but there are caveats, too. Here is a quick analysis of FedEx and its business environment.
Strengths
- Good finances: FedEx has little debt on its books. With a debt-to-equity ratio of 10%, this company looks lot lighter than bigger competitor United Parcel Service (NYSE: UPS), which has a debt-to-equity ratio of 157%.
- Growing ground business: FedEx's ground shipping business now accounts for over 20% of its annual revenue. Not only has this segment seen considerable growth in the recent year (with people increasingly using cheaper shipping facilities), it also operates at a margin of 15%, which is significantly higher than the operating margin of its other segments.
- A push from e-tail: FedEx continues to benefit as online shopping picks up, thanks to companies like Amazon.com (Nasdaq: AMZN) and eBay (Nasdaq: EBAY). Fedex and UPS are the two primary delivery companies for these online giants and stand to gain in a big way from their rapid growth.
- Bottom-heavy: Net income during the past year (February 2011 to February 2012) grew at an impressive 55%, reflecting strength in its business divisions.
Weaknesses
- Competition from the big fish: FedEx's biggest concern is to protect its client base from big brother UPS, which is the largest package delivery company in the world. In fact, UPS recently expanded its European business by acquiring TNT Express, a Dutch package delivery company. However, FedEx plans to concentrate on organic growth in Europe to help offset this challenge.
Opportunities
- Shift to fuel efficiency: FedEx has ordered more fuel-efficient aircraft from Boeing in a bid to curtail costs. This is expected to improve the company's operations and margins in the long term.
- Emerging options: High-growth nations such as India and China, where the package delivery business has not been able to gain a strong foothold yet, pose an excellent opportunity for FedEx.
Threats
- Global slowdown: FedEx and other package delivery companies act as a barometer for the economy. This also means that recessionary conditions can spell disaster for such companies. On a different note, potential investors expecting a high growth rate from countries such as China need to be cautious given its recent economic slowdown.
- Fuel costs: Rising fuel costs have crimped FedEx's already-thin margins. This is a real cause for concern. For instance, at the end of the company's financial year in May 2011, FedEx's annual revenue grew by 13%, while fuel expenses increased by a whopping 34%.
The Foolish bottom line
Investors need to keep a close eye on competition and rising fuel prices. However, I still think the company is positioning itself for long-term growth, and its strong fundamentals should help see it through. FedEx has bagged a coveted four-star ranking from our Motley Fool CAPS community. Keep track of the company by adding it to your Watchlist, our free and personalized stock-tracking service. Click here to add FedEx to your Free Watchlist.
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