To borrow a phrase from the company's still famous advertising slogan of yore, it's "absolutely, positively" no surprise thatFedEx Corp. (FDX - Get Report) , operator of the world's largest cargo airline, is en route to fast growth during the impending holiday season.
Last month, FedEx announced that it's anticipating a record holiday season this year. The delivery giant expects to deliver 317 million packages between Black Friday and Christmas Eve, a year-over-year increase of 12.4% from the same period in 2014.
A buoyant consumer should lift the stock of this speedy parcel-delivery specialist in the coming months, making it a direct way to profit from an expected "Santa Rally" this holiday shopping season. I'll also explain why I prefer FedEx to its archrival, United Parcel Service (UPS - Get Report) .
FDX data by YCharts
Economic recovery already has lifted the operating performance of FedEx. The company reported earnings-per-share (EPS) of $2.42 for the first quarter ended August 31, compared to EPS of $2.12 in the same period a year ago.
Revenue came in at $6.59 billion, a decline of 4% from last year's $6.86 billion, largely due to unfavorable currency fluctuations. Operating income was $545 million, a surge of 45% from $377 million a year ago. Operating margin reached 8.3%, up from 5.5% in the same year-ago period.
In a sign of the company's confidence in consumer demand, FedEx announced in September that it plans to boost its shipping rates at the start of 2016. Effective Jan. 4, the company revealed that shipping rates for FedEx Express, FedEx Ground, FedEx Home Delivery, and FedEx Freight would increase an average 4.9%.
Memphis-based FedEx encompasses four segments managed collaboratively under the aegis of its universally recognizable brand:
FedEx Express, the world's largest overnight delivery company, offers time-certain delivery within one to three business days; FedEx Ground provides low-cost, small-package ground delivery service to every business address in the U.S. and Canada, as well as delivery to nearly 100% of U.S. residences; FedEx Freight handles less-than-truckload freight services; and FedEx Services provides other companies with sales, marketing and technology support.
A leading component of the Dow Jones Transportation Average, FedEx is viewed as a barometer of the wider economy. For the same reasons that investors studied railroad stocks in the 19th and 20th centuries to understand economic trends, investors today increasingly focus on companies such as FedEx to divine the bigger picture.
The second-largest package delivery company in the world, behind UPS, FedEx will be an important brand name to watch during the recovery. Slowing revenue in the wake of the Great Recession of 2008-2009 added impetus to FedEx's cost-cutting campaign, which has included a voluntary employee buyout program and the grounding of aging, fuel-guzzling cargo planes.
Even before energy prices collapsed, the company has been mothballing older jet freighters this fiscal year, replacing them with newer Boeing 767-300 and 757-200 aircraft that burn less fuel and are cheaper to operate and maintain. The company estimates that these combined efforts will eliminate up to $900 million in costs.
Every day, FedEx Express' global air-shipping network delivers an average of 3.4 million packages from more than 6,400 authorized shipping centers, totaling about 26.5 million pounds.
At the same time, the company's chief rivals are struggling with long-term challenges from which FedEx is immune. UPS, aka "Big Brown," is saddled with an aggressive union that severely restricts the company's ability to rein in costs and streamline its workforce, whereas FedEx is a non-union shop and is likely to stay that way. UPS is only one among many stocks with daunting challenges ahead.
FedEx is not only unencumbered with these limitations, but it's also well positioned to capitalize on the economic rebound. Growth sectors such as technology and pharmaceuticals demand frequent speedy shipments with high assurance of delivery, which is the bread-and-butter service of FedEx. The company is an integral part of the increasingly extended global supply chain, equally trusted by huge corporations and mom-and-pop outfits.
FedEx also is opening scores of new stations in emerging markets, such as China, Brazil and Eastern Europe, as part of an organic expansion plan. Even though China's annual economic growth has slowed to about 6.5%, the vast country still represents tremendous opportunities for FedEx.
As for competition from e-commerce giant Amazon, company Vice President Mike Glenn made a convincing case earlier this year, when he said, "Research has indicated time and time again that a uniformed person with proper identification showing up at your doorstep is an important issue for customers. Consistency of customer experience is very critical in that regard. So when you talk about the challenges of building a network, the scale, the input costs, the technology issues and the customer experience required to deliver what customers expect of companies like FedEx and our primary competitors, it's a pretty tall hill to climb."
FedEx stock now trades at about $158, with the mean average analyst calling for shares to rise to at least $184 over the next year.
As I've explained, FedEx is a great stock to own right now, especially as the holidays gather steam. However, if you want to see a list of the absolute worst stocks you can own right now, I urge you to take a look at this report called 29 Dangerous Stocks: Sell Now! Inside, you'll see a full list of the market's most overvalued stocks, and learn the process you can use to keep avoiding them in the future. Click here now for a copy.
By John Persinos
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