FedEx Delivering Reliable, Solid Income

07/06/2012 8:15 am EST


Despite global economic troubles, the logistics company continues to grow its fleet, its footprint, and its dividends, notes Marc Johnson of The Investment Reporter.

FedEx earned far more last year. It’s expected to earn even more this year, despite a possible economic slowdown. That’s because the company plans to cut costs and raise its profit margins. The shares remain a buy for gains and rising dividends.

In the year to May 31, FedEx earned $2.09 billion, or $6.59 a share, excluding one-time items. This was up by more than a third from $1.56 billion, or $4.90 a share, a year earlier. It’s also the company’s second-best earnings, only slightly short of record earnings of $6.67 a share in fiscal 2007.

Chairman, president, and CEO Frederick Smith says the better earnings reflected “outstanding performance by FedEx Ground, our new value proposition at FedEx Freight, and improved yields across all transportation segments.”

In fiscal 2013, FedEx plans to raise its operating efficiency and the financial performance of all of its businesses. To this end, FedEx Express retired 18 Airbus aircraft and 26 related engines, as well as six Boeing aircraft and 17 related engines, in the fourth quarter of fiscal 2012. The company says this will better match its US air network capacity with current and expected shipment volumes.

Also in 2013, FedEx will shift its capital spending from fewer aircraft at FedEx Express to more investment in the “high-margin, high-return FedEx Ground business.” All told, the company expects its capital spending to decline to $3.9 billion this year.

FedEx is also making acquisitions abroad. On June 14, it bought Polish courrier company Opek. Chief operating officer Michael Ducker says, “We view Poland as a key market for investment and growth.”

FedEx picks up a ground network that generates $70 million from 12.5 million shipments a year. Opek can offer its customers direct access to FedEx’s network that connects over 220 countries and territories. We think FedEx is smart to use its financial strength to expand in Europe in the midst of that continent’s financial crisis.

FedEx has also agreed to acquire Rapidao Cometa Logistica e Transportes of Brazil. This company provides more than 12 million deliveries a year to its 17,000 clients. Rapidao Cometa operates 770 vehicles and trailers, 45 operational branches, and 145 distribution points across Brazil.

FedEx does face some higher costs in fiscal 2013. Historically low interest rates have hurt its pension plan. The company is adding $150 million to cover a shortfall. It faces higher depreciation costs. And the global economic slowdown could hurt FedEx’s businesses.

But executive vice president Alan Graf says, “We expect to mitigate these challenges by reducing costs and improving efficiencies, and are continuing to evaluate additional actions to substantially improve FedEx Express [profit] margins.”

This year FedEx expects to earn from $6.90 to $7.40 a share. This would set a new earnings per share record. That should drive up the share price and the dividends. Buy.

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