On Monday, FedEx (FDX +3.98%) announced a new stock repurchase program covering 15 million shares. That represents slightly more than 5% of FedEx stock. This serves as a follow-up to an even larger buyback program that was initiated in late 2013 and concluded last quarter.
FedEx is on a roll. Is it time to buy the stock?
Clearly, FedEx's management thinks that this is a great time to buy FedEx stock. In the past year alone, FedEx has reduced its share count by more than 10%. Should individual investors be looking to load up on FedEx shares, too?
Valuation is still reasonable
FedEx stock has been on a tear for the past two years, after being stuck in a holding pattern for most of the past decade. As FedEx has started to make progress on its restructuring program -- first announced in late 2012 -- investors have become more optimistic about the company's long-term profit growth prospects.
FedEx 10-Year Stock Chart. Data by YCharts.
Despite this ballooning share price, FedEx stock's valuation is still quite reasonable, because earnings growth is keeping pace. The company projects that EPS will reach $8.50-$9.00 in FY 15, which would mark a 26%-33% improvement over its FY 14 EPS of $6.75.
For Q1 of FY 15, FedEx reported earnings that easily beat most analysts' expectations. That's a good sign that the company could meet or exceed the high end of its EPS guidance range this year.
Furthermore, FedEx has additional profit growth drivers beyond FY 15, including the growth of its high-margin FedEx Ground business, and the replacement of older, fuel-guzzling planes with more efficient models. As a result of this projected profit growth, FedEx's forward earnings multiple has not risen nearly as much as its stock price.
FDX P/E Ratio (Forward). Data by YCharts.
FedEx stock currently trades for about 18 times projected FY 15 EPS, and 15 times projected FY 16 EPS. That's pretty similar to the broader market's earnings multiple.
Based on FedEx's recent earnings growth rate, these modest multiples make the stock look positively cheap. That said, FedEx's current earnings growth spurt is being helped by its restructuring, and the company doesn't have many big cost-cutting opportunities left. Still, even if earnings growth will slow, FedEx stock's valuation seems very reasonable.
Threats should be manageable
Strong earnings growth this year and next year would not be much comfort to investors if FedEx were to face a disruptive threat to its business soon thereafter. FedEx does face some noteworthy threats. For example, the USPS is becoming more aggressive on pricing for bulk shippers.
Amazon's "in-sourcing' of package deliveries is a potential threat to FedEx.
This could allow the USPS to gain share in e-commerce shipments, one of the biggest growth markets for FedEx. A second threat in that area comes from Amazon.com, which dominates the e-commerce market, and has started to "in-source" some of its shipments. If Amazon ultimately handles its own deliveries, FedEx would miss out on a significant growth opportunity.
These threats impact rival package delivery service UPS more than they do FedEx. FedEx is a relative newcomer in the ground delivery business, which UPS still dominates. UPS delivers 42% of all e-commerce shipments, with FedEx, the USPS, and smaller companies fighting for the rest.
Between the growth of the overall e-commerce market and its relatively small share today, e-commerce remains more of an opportunity than a threat for FedEx. Indeed, FedEx has posted very good results in the past year despite losing a significant amount of shipment volume from Amazon.
FedEx stock: Still a decent pick
At $160, FedEx stock is no longer the "no-brainer" that it was when it was trading for less than $100 last year. That said, FedEx shares remain at a reasonable valuation: 18 times expected FY 15 earnings. Moreover, the company's management appears confident that the company's turnaround is on track.
As a result, it's still not too late to buy FedEx stock. As the company gradually improves the efficiency of its operations and rides the global economic recovery from the Great Recession, there could be more upside for long-term FedEx investors.
