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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


June 18th 2010 FedEx
NYSE Symbol: FDX
Industry: Delivery & Transportation
Price as of 6/18: $78.70

Hopefully the markets are recovering from a recent 12% correction. The concensus seems to be the economic fundamentals remain in tact, but the economy will not recover as quickly as expected and therefore any improvement in the labor market will take longer than anticipated. A key barometer for the economy is the Dow Jones Transportation Average. A year ago the Dow transports were on a tear as the economy improved boosting business for all the transportation companies. A year ago this week we featured FedEx. The stock is up 53% in one year. Not bad. This week we will feature the stock once again following better than expected earnings. The stock did trade lower this week follow the earnings due to conservative guidance, but ironically the company did the same thing last year and then recovered the next day following an upgrade from Stifel. This year it was Deutsche Bank reiterating a buy rating as they see a very compelling risk/reward proposition at current levels given FeddEx's operating leverage and growth potential. Their target is $114 a share which would translate into a 45% return in the next year. That would be good.
For the fiscal fourth quarter, FedEx earned $419 million, or $1.33 a share, beating estimates by a penny. Revenue rose an impressive 20% to $9.43 billion verse estimates of $9 billion. Average-daily-package volume jumped 23%. In the U.S., daily volume edged up 1%. The FedEx Ground division saw operating income rise 57% to $319 million with revenue up 15% to $1.96 billion. Daily package volume grew 7% with the yield up 5%, primarily due to higher fuel charges. On a post-earnings call with analysts, executives were bullish about the global outlook, providing a full-year forecast for the first time in two years. But the company's profit view came in below the Wall Street consensus because of higher equipment and employee-related expenses. So the only weakness is coming from the cost side of the business. Another bullish sign is the fact FedEx is pulling some of its "parked" aircraft out of retirement. Last year the company re-introduced six aircraft to its fleet and it expects to re-introduce more than that over the coming year. Interestingly, bringing the retired planes back on line is driving the company's higher maintenance expense for the year as each plane can cost up to $1 million before regaining a flight-ready status.
A year ago, FedEx was trading for 16 times 2010 estimates. Now the stock is trading for 20 times 2010 estimates, but only 15 times next years earnings. Earnings are expected to jump over 30% next year. Not bad. The stock also trades for 0.74 times sales and 1.7 times book value. FedEx provides a modest dividend, so this is not an income idea, but more of a growth story. If the economy continues to recover, FedEx should do fine. Maybe not 50% return, but if FedEx reaches Duetsche Bank's price target of $114, that would translate into a 45% return.