Dueling Fools
FDX-cess?
March 31, 1999

FDX Bull's Pen
by Paul Larson ([email protected])

The case for FDX is a piece of cake to write since I think the stock may be one of the most obvious "no brainers" on the market today. With Federal Express being the world's largest air express company, FDX is an excellent way for investors to take advantage of the growth of electronic commerce. And unlike some of the other companies benefiting from the Internet, FDX is one of the few that has a down-to-earth price tag.

Let's first look at the e-commerce angle. From Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> to eBay <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> and all the companies in between, goods sold over the Internet need to get from seller to buyer. And with slightly less than a quarter of all goods sold over the Web being delivered by FedEx, the company is plainly positioned to gain from the explosion in online buying and selling. In other words, with FDX an investor can own a play on Internet commerce without having to worry about accidentally betting on the second banana or a company with a risky financial structure.

Said another way, FDX is an excellent way to bet on the growth of electronic commerce as a whole, and I think there are few safer bets around.

Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> has said that it expects the airborne package delivery market to triple in the next twenty years. While certainly not the mind-blowing growth seen by some of the other companies operating on the Internet, the barriers to entry into FDX's domain are extremely high, leaving FDX to absorb most of this gain. More importantly, FedEx already has an established and profitable business that's churning out impressive profits.

Of course, FedEx is not the only organization that will see increased business down the road courtesy of the Web. UPS and the Postal Service are also delivering an impressive number of packages, but both are rather stodgy and work primarily with packages that are either large or not time sensitive. Federal Express has positioned itself as THE company to deal with when time is critical, and the airfreight business has proven to be a profitable niche within the shipping arena. As they say, when it absolutely has to be there overnight, there's really only one choice to turn to.

It's also important to note that Federal Express is also gaining from the emergence of a global economy. The company has operations in 211 countries at the moment, and the international business is set to grow significantly. It's also interesting to note that Federal Express is the only American package company allowed to fly its own planes into China, giving it quite an edge in an important and emerging economy. Just like electronic commerce, it's a pretty safe bet that shipments to and from abroad will generally increase in the coming years.

Let's now turn an eye towards the company's finances, which appear to be quite healthy at the moment. Things are going so well that the company has smoked the mean Wall Street estimates for three quarters in a row now. Over the last two quarters, the company has bested the analysts' guesses by 16%, which is quite an impressive showing. Will the company continue to outperform expectations? History has shown that it is nothing to be surprised about.

FDX has shown increased profits for each of the past six years, and the company is well on its way to seven straight years of earnings growth. Over the past five years the company has managed to grow its earnings just shy of 30% a year, and continued growth is anticipated.

For the fiscal year ending in May, $4.02 in per-share profits are expected, and analysts are expecting $4.78 in EPS for the year ending in May 2000. I have absolutely no reason to doubt the estimates, and these numbers put the company trading at, as of this writing, right around 20x forward estimates. That's far below the average P/E ratio of the S&P, and miles south of where almost all Internet-related issues are trading. Look at just about any other common valuation metric and you will see that FDX is trading below the rest of the market. The price-to-book value and the sales and cash flow ratios all show the company trading at quite a discount compared to the average stock in the S&P 500.

The bottom line with FDX is that the company's fundamental operating environment is in good shape and looks to get better in the near future. Plus, investors today are able to buy a top-shelf company at an extremely reasonable valuation.

Next: The Bear Argument