FedEx Corporation (FDX, Financial) is a value creator with the stock having surged by 26% in the last year. However, YTD15 has been ordinary for FedEx with the stock remaining flat in the first three months. In my view, the stock has the potential to surge higher in the coming quarters and this article discusses the reasons for being bullish on FedEx through 2015.
The first point that I want to mention here is that the company’s performance is directly linked to the global economic performance. Therefore, the company’s outlook can be judged by the global GDP growth or industrial production likely trend.
According to FedEx’s report on the global economy, the world GDP is expected to grow at 2.8% in 2015 after growth of 2.4% in 2014. Further, US GDP is expected to grow at 3.1% in 2015 after a growth of 2.4% in 2014. Overall, the growth trend for 2015 is likely to be stronger than 2014. A clear implication is that the company’s growth trend is likely to sustain through 2015 and this will take the stock higher.
On March 18, 2015, FedEx reported 3Q15 results and the company reported an EPS of $2.01 per share for 3Q15 as compared to an EPS of $1.23 per share in 3Q14. Therefore, the EPS growth has been robust and the improvement in operating results has come primarily due to volume and base yield growth in all three transportation segments and a significant net benefit from fuel.
In my view, the benefit of lower fuel costs will continue through 2015 and this will drive operating margin higher. I must also mention here that share repurchases had a $0.11 year-over-year positive impact on third quarter earnings per diluted share. This will also continue to boost the company’s bottom-line in addition to higher operating margin in the coming quarters.
FedEx projects earnings to be $8.80 to $8.95 per diluted share for fiscal 2015 and this implies a forward PE of 19.2 for FY15. If the current EPS growth sustains, the FY16 EPS and forward PE will be even more attractive and this will trigger strong stock upside. Even from a margin front, a capital expenditure of $4.2 billion in 2015 is aimed a fleet renewal and this will help boost operating margin through higher fuel efficiency fleet. Therefore, FedEx has also the positive triggers in place for strong growth in the coming quarters.
While the FedEx express segment revenue was flat on a year-on-year basis, the FedEx ground segment has been the key revenue driver and will continue to be the key growth driver in the coming quarters. For 3Q15, the segment revenue increased by 12% to $3.39 billion from $3.03 billion in the prior year.
In conclusion, FedEx is an excellent stock to own for the near-term as well as the long-term. After a stellar rally in 2014, the stock has moved sideways for the first three months of 2015 and this provides investors with a good buying opportunity before the stock resumes its next uptrend. In addition to the stock upside potential, FedEx will continue to create value through share repurchase and regular dividends. The company’s current dividend payout of $0.8 per share is likely to increase in the coming years. I remain bullish on FedEx and my view is to consider exposure even at current levels.
