FedEx: "A World Class Franchise"

08/19/2005 12:00 am EST

Focus:

Richard Band

Editor, Profitable Investing

A contrarian by nature, Richard Band is looking for opportunities among stocks that have been hurt by rising energy prices. "Of all the blue-chip energy users, who is doing the best job of coping with high costs?" He says, "My vote goes to FedEx."

"Everybody knows  FedEx Corp. (FDX NYSE) as the world leader in express delivery of packages, documents, and freight. In addition, FDX owns Kinko’s, which operates about 1,200 copy and printing centers. FedEx is well aware of China’s pivotal role as a supplier of manufactured goods to the global economy. In mid-July, the company announced plans to shift its East Asian hub from the Philippines to Guangzhou (southern China) by 2008. Already, FedEx serves 220 cities in China. Within five years, that figure is expected to jump to 320. Here’s an American company that—instead of moaning about China’s growth—is effectively harnessing it.

"What many investors don’t realize, though, is that FDX is maintaining robust profit margins in spite of high oil. True, the company’s earnings for the fiscal fourth quarter (ended May) came in two cents shy of Wall Street forecasts. And FDX trimmed its guidance for the August quarter, too. But this amazing organization still managed to post record FY05 profits, up 71% from 2004—not exactly shabby in the face of skyrocketing costs for gasoline and jet fuel. What’s more, FDX is predicting another 10%–15% gain in net income for fiscal 2006. If FedEx can perform like this in a hostile fuel market, how do you think these folks will do when oil prices take a breather?

"You might imagine that Wall Street is thrilled with the company's superb results. Not so; the stock is trading near the low end of its 52-week range, and at a P/E of just 16 times (based on estimated year-ahead earnings), near the low end of its five-year range. Sure, there are risks—the greatest being that a blundering Fed might raise interest rates too far and throw the economy into a slump. In my opinion, the stock is cheap. Believe it and buy. We’ll carry the stock in the model portfolio under World-Class Franchises."

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