FedEx Delivers

03/10/2006 12:00 am EST

Focus:

Jon Markman

Editor, Trader's Advantage

"The Dow transportation average is motoring ahead, and FedEx is one component that keeps on truckin’," notes Charles Carlson. The stock is also a recent feature from Jon Markman. Here, both advisors look at a firm that is poised to "deliver."

"The Dow transportation Average, despite high energy prices, continues to motor ahead and one component at this time that looks especially appealing is FedEx (FDX NYSE)," notes Charles Carlson, editor of DRIP Investor. "The firm’s profit performance in the last two quarters has been especially impressive, and record results are expected for the current fiscal year ending May 31. The stock offers an attractive way to gain exposure to the transportation sector.

"FedEx provides a variety of delivery services through its own air-ground transport system. The firm also owns the Kinko’s chain. Per-share profits have grown in each of the last 12 quarters. Per-share profits easily outpaced the consensus analysts’ earnings estimates in the last two quarters. The better-than-expected results have caused analysts to boost their profit estimates for fiscal 2006 and 2007. For fiscal 2006, profits should jump at least 20%.

"The firm will benefit from steady price increases as well as continued overseas expansion. In January, the company expanded its exposure to China with a $400 million buyout of its partner in a joint venture. The move will double FedEx’s work force in the country to 6,000 at 89 locations and position the firm nicely for the expected growth in China’s air-cargo market. Long-term results should benefit from continued expansion of Kinko’s. FedEx should also be a beneficiary of growth in e-commerce.

"FedEx currently trades at 18 times fiscal 2006 consensus earnings estimate of $5.78 per share. That’s a reasonable multiple to pay for a company that should grow well in excess of the average US corporation. A strong economy should continue to work to FedEx’s advantage. An unknown, of course, is the price of fuel, but FedEx has been able to do well even with high prices. Thus, any sustained decline in fuel prices could boost these shares sharply. We rate the stock a long-term buy and believe that its long-term appreciation prospects are well above average."

Jon Markman, a leading expert in swing trading, and editor of Strategic Advantage, adds, "When you’re just driving around town, you naturally never stop to count the number of trucks that are whizzing by, delivering machinery and food and mail and who knows what else. But the sheer vastness of the task of distributing everything bought and sold every day is quite stunning. Indeed, the the American Trucking Association just published a report that stated its Truck Tonnage Index increased for the fifth straight month to the second-highest level in history.

"In case you’re not up to speed on trucking lingo, ‘tonnage’ is the weight of freight in tons transported by a truck. Since nearly three-quarters of all manufactured and retail goods travel by truck domestically, the Tonnage Index is a great barometer of the economy. When there is a lot of freight on the road, factories and stores are humming. So don’t let the naysayers snow you. The US manufacturing and retail economy is roaring back, even if it occasionally gets waylaid on the side of the road.

"One of the prime beneficiaries of an increase in commerce are delivery services like FedEx. The Memphis-based firm, whose shares are up 6% this year to a new all-time high, reports income on March 22, and I think it’s going to surprise on the upside. Consensus estimates for the third quarter, ended in February, are at $1.28, but my calculations suggest they’ll come in at more like $1.32, for a 24% year-over-year growth rate. My estimates for full fiscal year 2006 and 2007 are $5.87 and $6.80.

"If you put a price multiple of 20 on my 2007 number—which is in line with historical valuation levels—you get a price in the $136 area, which would be a 27% advance from here. I have little doubt that FDX can get there, as it is doing a terrific job of profitably leveraging its business model overseas, both in Asia and Europe, rather than just building volume for the sake of gaining share. The big gains won’t happen overnight. More like second-day, afternoon delivery. But they will come."

Editor's Note: At the recent World Money Show, I had the pleasure of hosting the Socially Responsible Investing panel, which includied FedEx among the panelists. The Webcast for this panelalong with numerous other free Webcasts from The World Money Showis available to all Digest readers for FREE at www.moneyshow.com

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