Amid the rapid growth of the global delivery market, FedEx Corporation (NYSE:FDX) has been fulfilling an ever-larger share of ground deliveries. But while that expansion should yield strong earnings growth for the company going forward, FedEx Corporation (NYSE:FDX)’s shares have dropped more than 5% in the past few weeks. Is this a tremendous buying opportunity, or should prospective investors wait for shares to correct further?
The State of FedEx: 2013
Currently, FedEx is the largest provider of express air delivery services in the world. The company operates their express business with a network of over 52,000 vehicles, 660 aircraft, and almost 60,000 drop-off boxes, in more than 220 countries.
Express delivery services, which includes same-day and overnight shipping, make up 62% of the company’s revenues. About half of the express business’ revenues come from international markets, and the company’s air delivery serves more than 400 cities worldwide.
The rest of FedEx Corporation (NYSE:FDX)’s revenues mostly come from its ground delivery business, the U.S.’s second-largest largest package delivery service. The company’s focusing most of its current expansion efforts on this ground segment, as FedEx takes measures to continually improve the speed, reliability, and footprint of its delivery network.
At 12% of its revenue, FedEx also offers freight service, which provides LTL (less-than-truckload) shipping services throughout the United States and Canada, with a variety of flexible shipping options.
The FedEx Corporation (NYSE:FDX) Office segment, which evolved from the company’s acquisition of Kinko’s in 2004, accounts for another 5% of the company’s revenues. It operates about 1,200 copy centers that also provide shipping and business services.
The Numbers Look Good!
FedEx trades for just under 16 times the current fiscal year’s consensus earnings of $6.05 per share, which are set to be released on June 19. Due to rising revenues and higher margins, earnings are projected to rise to $7.42 and $9.18 per share for fiscal years 2014 and 2015, respectively. This translates to annual earnings growth of 22.6% and 23.7% over the next two years.
In other words, FedEx Corporation (NYSE:FDX) trades for just 10.5 times what it is projected to earn in two years from now. Not bad for a company that’s growing at a double-digit rate, and which has an excellent balance sheet with more than $1.6 billion more cash than debt.
A Few Alternatives
While there aren’t many direct competitors of similar size and structure as FedEx, there are a few alternatives in the delivery segment. The No. 1 delivery company in the world by sales volume, United Parcel Service, Inc. (NYSE:UPS) is more domestically oriented than FedEx Corporation (NYSE:FDX), with just 22% of its revenues coming from international business.
United Parcel Service, Inc. (NYSE:UPS) trades for just over 17 times the current fiscal year’s projected earnings, which is comparable to FedEx. However, the company is projected to grow at around 12% annually. That’s still very good — just not quite as good as FedEx, mostly as a result of FedEx’s much more aggressive cost-saving initiatives.
That said, it’s worth considering United Parcel Service, Inc. (NYSE:UPS)’s dividend yield of almost 3%, which is sure to lure some income-seeking investors away from FedEx Corporation (NYSE:FDX).
For those who would prefer a smaller shipping company, take a look at C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW). About one-fifth of the size of the other two companies mentioned, C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) is one of the larger third-party logistics companies in the U.S. The company has transportation contracts with about 56,000 companies including railroads, motor carriers, and air freight carriers.
At 19.5 times its current-year earnings, C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) is the most highly valued of the three; however shares are appealing at their current levels. The company pays a dividend of 2.3%, has zero debt, and is projected to grow its earnings by over 13% annually going forward.
Conclusion
While there certainly are some viable alternatives, I still like FedEx Corporation (NYSE:FDX) in the delivery and shipping sector. The kind of earnings growth that it has projected is both outstanding and achievable, if the company’s recent results are any indication. Assuming a P/E ratio of 16.5, which is actually lower than FedEx’s historical average, this could easily become a $150 stock in two years, if the company meets the projections. After the recent pullback, now may be an excellent opportunity to get in on one of the few remaining bargains in the current bull market.
The article A Bargain in the Delivery Business originally appeared on Fool.com and is written by Matthew Frankel.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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