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Can FedEx keep on delivering for investors?
A positive earnings surprise drove the stock up 8% on Wednesday, but with energy ready to spike again this might be a good time to sit on the sidelines.
By Robert Walberg
FedEx (FDX, news, msgs) delivered in a big way on Wednesday, posting better-than-expected earnings for the first quarter of fiscal year 2006 and slightly raising its full-year 2006 earnings estimate. Its ground, express and freight businesses all recorded double-digit growth rates.
The good news caught Wall Street off guard, particularly in light of recent events, such as Hurricane Katrina, that have been a headwind for the company. FedEx stock rose 8% on volume of 7.2 million shares, almost four times the daily average.
But with Rita swirling in the Gulf and energy prices threatening to rise again, this may not be the time to follow other investors in snapping up FedEx shares.
A recipe for more gains
Given that the stock was hovering just above its 52-week low, and trading at a modest discount to the rest of the market, additional near-term gains are possible. In fact, investors shouldn't be surprised to see FedEx race toward $90 by year end. But if FedEx is to sustain its momentum and the stock is to challenge its 52-week high of $101.87, then it will have to accomplish most, if not all, of the following.- Continue to gain market share in its domestic ground and freight business. The company has the lowest cost structure in the ground business and only about a 20% share, compared to 60% for UPS, so the potential to build share over the next few years is obvious. Realizing that potential without depressing margins is the challenge, but if last quarter was any indication the outlook is promising.
- Leverage the company's brand strength, logistics expertise and product breadth to achieve deeper penetration in international markets, especially in Asia, where growth remains robust.
- Maintain tight cost controls, particularly in the domestic express marketplace, where margins are relatively low. Recent improvement on this front is encouraging.
- Refuse to defend share at all costs. A price war similar to the one that ripped apart the airlines won't benefit any of the players. Investors were encouraged when the company said prices were actually beginning to firm, suggesting the feared price war with UPS wasn't imminent.
A challenging global backdrop
Even if the company manages to accomplish these tasks, it still faces the uncertainty of a global economy struggling with higher energy costs. Though FedEx has successfully used fuel surcharges to partially offset the rising costs of jet fuel (up 51% last quarter versus year ago), demand growth is almost sure to slow if energy prices continue their relentless march higher.
Some analysts have argued that a slowdown in the express business might not be that bad for the company, especially as margins in this unit are in the low single-digits, while ground-shipping margins are in the mid-teens. Clearly, a shift from the former to the latter might not be all that bad. But all business is apt to slow if the global economy does.
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Consequently, while FedEx rode the trade winds to an 8% gain yesterday, it is the wind swirling around hurricane Rita that could dictate the company's intermediate-term future. If the storm does serious damage to the Gulf Coast energy business, and fuel prices surge to new heights, then all bets are off regarding the rest of fiscal year 2006. Even management conceded that if oil prices rallied well above $70 per barrel and stayed there, the outlook would be difficult.
FedEx is a well-managed company with excellent brand reputation trading at a discount, and it has favorable earnings momentum. Normally, investors should jump all over such an investment opportunity. But these aren't normal times. There's no reason for investors to make an overnight decision on FedEx stock until the energy and macroeconomic pictures clear up and the earnings outlook is more secure.
Portfolio updates
Though I may come to regret this decision, the ongoing weakness and technical breakdown in the housing sector suggests that it's time to close out my housing-stock positions in my Street Patrol stock pick portfolio.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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