FedEx Corporation (FDX) surged by 6.2% to $148.95, after posting strong results and beating consensus estimates. The following day, stock has cooled down by correcting marginally by 0.9%. This article discusses the positives from the results and the reason for considering FedEx undervalued at these levels. Therefore, I expect that the stock will continue to rally.
Rally On Strong Results
For Fiscal Year 2014, FedEx reported a strong set of results and the highlight for me was the margin expansion and the EPS growth. The company's operating margin increased by 30 basis points to 7.6% in FY14 from 7.3% in FY13.
The EPS growth was also a strong 8.3% with 2014 EPS at $6.75 as compared to $6.23 EPS in FY13. For FY14, FedEx acquired 36.8 million shares through share repurchase program and this helped the company to boost the EPS apart from the margin expansion.
From a financial flexibility perspective, the company closed the year with a strong cash position of $2.9 billion and an operating cash flow of $4.2 billion. With FedEx incurring a capital expenditure of $3.5 billion for FY14, the company had a strong free cash flow.
FY15 Outlook Points To Further Rally
For fiscal 2015, FedEx projects earnings to be $8.50 to $9.00 per diluted share. Further, capital spending for fiscal 2015 is expected to increase to approximately $4.2 billion, which includes planned aircraft deliveries to support the company's fleet modernization program and continued expansion of the FedEx Ground network. Therefore, the outlook for 2015 is strong both in term of EPS growth and capital expenditure, which will translate into future revenue growth and improved margin.
The key point here is the strong EPS projected for 2015 and the company's forward valuation based on the EPS. On the higher side, an EPS of $9 would mean that the company expects a EPS growth of 33% from 2014 EPS of $6.75. FedEx is currently trading at a PE of 28 and a growth of 33% in earnings would mean that the PEG is less than one. Therefore, considering the growth prospects, FedEx is undervalued and the rally in the stock will continue.
Global Economic Recovery
The company's strong financial outlook is on the back of an expected economic recovery and if the recovery sustains, FedEx will be well positioned to growth at a strong pace over the next few years.
IMF estimates suggest that global GDP growth will improve from 3.0% in 2013 to 3.7% in 2014 and 3.9% in 2015.
On a bifurcated basis, emerging markets and developing economics are expected to grow at 5.1% and 5.4% in 2014 and 2015 as compared to 4.7% in 2013.
Robust economic activity will result in increasing global trade and this will directly benefit FedEx.
Risk Factors
There are certain risk factors associated with the bullish outlook. Global GDP growth can take a hit if the tensions in the Middle-East escalate. The tensions will result in higher oil prices and inflation can negatively impact growth. FedEx will be directly and indirectly impacted by any such event.
Rising fuel cost will dent the company's margin and sluggish GDP growth will have an impact on the revenue. This risk needs to be watched closely for investors who are going long on FedEx.
Conclusion
FedEx is on a strong growth path along with improvement in key margins. The company has guided for a very strong 2015 and this will result in more rally for the stock. Some key margin expansion initiatives for 2014 will benefit the EPS along with the ongoing share repurchase program.
Even at current levels and after a strong rally in the recent past, FedEx is a strong buy considering the growth prospects over the next two years.
About the author:Faisal HumayunSenior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research| Currently 0.00/512345 Rating: 0.0/5 (0 votes) |
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