FedEx Corporation Is Delivering All Time Highs

Source: Thinkstock

Source: Thinkstock

FedEx Corporation (NYSE:FDX) stock is about to reach new all time highs. Most everyone is familiar with the company and has probably done business with them. As you probably know, the company provides transportation, e-commerce, and business services in the United States and internationally. What you may not know is that it operates in four segments: FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services. The FedEx Express segment offers various shipping services for the delivery of packages and freight. This segment also provides international trade services specializing in customs brokerage, and ocean and air freight forwarding services, customs clearance services, as well as global trade data, an information tool that allows customers to track and manage imports. Further, it provides international trade advisory services, including assistance with the customs-trade partnership against terrorism program, as well as publishes customs duty and tax information in various customs areas. In addition, it offers supply chain solutions, including critical inventory logistics, transportation management, and temperature-controlled transportation services.

The FedEx Ground segment provides business and residential ground package delivery services; and engages in the consolidation and delivery of high volumes of low weight and less time sensitive business-to-consumer packages. It primarily serves customers in the small-package market in North America. The FedEx Freight segment offers less-than-truckload freight services, as well as freight shipping services. As of May 31, 2013, this segment operated approximately 59,000 vehicles and trailers from a network of 370 service centers. Finally, the FedEx Services segment provides sales, marketing, information technology, communications, customer service, and other back-office support services; packing services, and packing supplies and boxes. On the back of the company delivering some stellar earnings, I am reiterating my buy recommendation and amending my price target to $163.

Just how good were earnings? Well, the company reported of $2.46 per diluted share for the fourth-quarter ended May 31. Last year’s fourth-quarter earnings were $2.13 per diluted share, excluding a $0.98 per diluted share business realignment program charge and a $0.20 per diluted share non-cash aircraft impairment charge at FedEx Express. Including last year’s charges, earnings were $0.95 per diluted share. Thus, quarter over quarter, earnings more than doubled when you factor in these charges last year.

I want to point out that both the FedEx Express segment and FedEx Ground segments led the way. In the FedEx Express segment, revenue increased due to 2 percent higher package volume and higher base package yields, partially offset by the effects of one fewer operating day, lower fuel surcharges, and lower express freight revenues. U.S. domestic average daily volume increased 3 percent, while U.S. domestic revenue per package was flat as lower fuel surcharges offset higher weight per package and favorable service mix. International export revenue per package grew 2 percent, as improved rates, higher weight per package, and favorable service mix more than offset lower fuel surcharges. Further, in the FedEx Ground segment, average daily volume grew 8 percent in the fourth-quarter, primarily driven by growth in e-commerce. Revenue per package increased 2 percent due to rate increases and higher residential surcharges, partially offset by lower fuel surcharges. FedEx SmartPost average daily volume decreased 8 percent while net revenue per package was up 8 percent due to rate increases and improved customer mix, partially offset by higher postage costs. Frederick W. Smith, FedEx Corp. chair, president, and chief executive officer, stated:

An outstanding fourth-quarter helped FedEx post solid results for fiscal 2014, and we believe we are well-positioned for a strong fiscal 2015. I would like to extend my sincere appreciation to the entire FedEx team for their contribution to our results and their continued commitment to providing outstanding service to our customers and connecting people and possibilities around the world. Excluding business realignment program costs and aircraft impairment charges last year, operating results improved on higher volumes and operational efficiencies at FedEx Freight, increased volumes and yields at FedEx Ground, and better revenue and cost performance at FedEx Express. During the fourth-quarter, the company acquired 9.9 million shares of FedEx common stock, increasing the fiscal 2014 purchase total to 36.8 million shares. As of May 31, 2014, 5.3 million shares remained under the existing share repurchase authorizations. Share repurchases benefited fourth-quarter earnings by $0.12 per diluted share.

So looking ahead, I have a $162 price target. How do we get here? Well, barring a stock market selloff, it will get here on earnings. For fiscal 2015, FedEx projects earnings to be $8.50 to $9.00 per diluted share. The outlook assumes no net year-over-year fuel impact and continued moderate economic growth. Capital spending for fiscal 2015 is expected to increase to approximately $4.2 billion, which includes planned aircraft deliveries to support the company’s fleet modernization program and continued expansion of the FedEx Ground network. With continued modest economic improvement, results in fiscal 2015 should benefit from base performance improvement and ongoing execution of the company’s profit improvement initiatives at FedEx Express, continued profitable growth at FedEx Ground and FedEx Freight, and its share repurchase program.

Finally, I will close with one more reason to buy the stock. The company also just announced 33 percent increase in the quarterly dividend. In short, this stock is a growth story and pays you to wait for said growth. My sentiment is buy.

Disclosure: Christopher F. Davis holds no position in FedExand has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $162 price target.