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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

FedEx

June 19th 2009 FedEx
NYSE Symbol: FDX
Industry: Transportation
Price as of June 19th: $51.45

During a recession, like we've been in, investors always watch the transportation stocks closely for any sign of a recovery in business. The Dow Jones Transportation Average has been acting great since March, up 50% signaling a bottom in the economy and an eventual recovery. This week, we'll feature one of the largest companies in that average, FedEx. FedEx is the nation's second largest package shipper with a fleet of about 670 aircraft and more than 80,000 vehicles (currently, only its pilots are unionized). FedEx and their largest rival, UPS are viewed as bellwethers of the economy because they transport a wide variety of goods from factories to retailers and consumers. FedEx did report disappointing earnings on Wednesday of this past week. The stock initially sold off, then recovered, and rebounded the next day thanks to positive comments from an analyst at Stifel. Short tern, business at FedEx will remain tough, but long term, the company is well positioned and the stock has plenty of upside.
This week, FedEx lost $876 million, or $2.82 per share in the three month period ending in May. Excluding one-time charges, earnings were 64 cents per share in the recent quarter which was their fourth quarter. The company took a $900 million write down related to the 2004 purchase of Kinko's, now known as FedEx Office, and $90 million in charges related to a September 2006 acquisition of a trucking company and its affiliates. It also took charges for employee severance and facility cutbacks.
Revenue in the fourth-quarter fell 20% to $7.85 billion. FedEx predicted earnings in the current quarter which is their first quarter will drop sharply from a year ago. The company sees a profit of 30 cents to 45 cents per share for the period ending in August, compared with earnings of $1.23 per share a year ago. Back in April, the Atlanta-based rival UPS offered a similar forecast. UPS's first-quarter profit plunged 55% and similarly offered a disappointing second-quarter outlook. On the FedEx conference call, management said that sluggish manufacturing and another run-up in fuel prices will hold back earnings. For the full fiscal year of 2009 which ended in May, FedEx posted a profit of $3.76 per share, compared with $5.83 a year ago. Revenue fell 6% to $35.5 billion. FedEx is not issuing guidance, but analysts are forecasting $3.30 so far for 2010.
The valuation of FedEx is compelling. FedEx is trading for 16 times next years modest earnings, 0.42 times sales, and just above the book value which is $50 a share. The company has $3 billion in debt, but $2.67 billion in cash, so there is no worry of a heavy debt load. Plus, even in these tough times, FedEx continues to churn out over a billion dollars in profits. As mentioned, an analyst at Stifel made positive comments on FedEx on Thursday. The Stifel analyst believes they are at the bottom for freight volumes. But it remains to be seen how long this bottoming process and following recovery will take. They think annual EPS should bottom in fiscal year 2010. They did lowering fiscal 2010 earnings to $2.72 from $3.40 (consensus $3.29) due to rising fuel prices and still-challenging freight markets. They believe the stock should trade range bound here around $50 until there is some resolution this summer with regard to FedEx Express' labor status or an economic recovery. When the economy eventually revives, later in the year as many predict, FedEx's earnings and stock, have plenty of upside.