Can FedEx Still Fly?

Gas prices are hitting record highs, and consumers are feeling the pinch. You can count me in as one who is limiting my driving and seriously considering trading my gas-chugging V8 for a diesel-driven Volkswagen or a Vespa scooter. Even Dean Kamen's Segway Human Transporter is more appealing than $50-a-pop fill-ups.

Consumers aren't the only ones looking forward to the hydrogen energy days of the future. While higher prices are good news for highflying Valero Energy (NYSE:VLO), they're definitely a real party crasher for one-time can't-go-wrong FedEx (NYSE:FDX). FedEx, like other freight delivery providers, is feeling the squeeze from rising oil prices. Companies like Motley Fool Stock Advisor pick Jetblue (NASDAQ:JBLU) and Southwest Airlines (NYSE:LUV) are under pressure, as well.

A year ago we were paying $1.22 less per gallon. These are real dollars, and for a fuel-dependent enterprise like FedEx, we can see the effects of these surging costs by looking at the past five fiscal years of fuel costs as a percentage of revenues. In fiscal years 2001 through 2004, the average was 4.5%. In fiscal 2005 fuel costs as a percentage of revenues jumped to 6.1%.

To mitigate these costs, FedEx is passing some on to consumers in the form of a fuel surcharge. However, its freight division will still take a hit, as it recently announced that it will limit the surcharge to "not exceed the most current pre-hurricane levels for the next 30 days."

You can see why its stock has been under pressure. Much like competitor UPS (NYSE:UPS), which peaked in December 2004, FedEx is now nearing lows not seen since a year ago. While some investors pass this stock like a hot potato, this Fool thinks that it's a good time to move it up on the watch list.

FedEx expects to earn an estimated $5.20 to $5.45 per share for this fiscal year. At the recent $79 to $80 price range, shares now trade at 15 times 2006 estimated earnings. Compared to its most recent price-to-earnings (P/E) average, this is awfully low. In fiscal years 2003 through 2005, its stock traded at a P/E of around 22. Today it trades at 32% below this average. The question prospective buyers will be asking is: Is this multiple low enough?

One thing is for certain: Shopping via the Web is here to stay, and shippers like FedEx stand to benefit. From shoe giant Zappos.com to bidders on eBay (NASDAQ:EBAY) to small businesses on Yahoo! (NASDAQ:YHOO), e-commerce has become a permanent and critical fixture in society. Given the growth of Internet and shipping sales, FedEx should be at or near the top of any investor's watch list. And when you throw in the recent weakness in its stock, it's a good time to pay extra attention to this enterprise -- this Fool believes FedEx stock will fly again.

Motley Fool Inside Value tracks companies that are down, but not out. Take a free trial and check out Philip Durell's latest (and past) bargain picks. FedEx and eBay are both Motley Fool Stock Advisor recommendations. If you're looking for great stocks at great prices, check it out with a free trial subscription by clicking here.

Fool contributor Jeremy MacNealy does not own shares in any of the companies mentioned.