FedEx Corporation (FDX), United Parcel Service, Inc. (UPS): This Express Delivery Stock Is a Long-Term Buy

Recently, FedEx Corporation (NYSE:FDX) lost nearly 7% of its market value in one day, from $106.46 per share to only $99.13 per share. The drop was due to a profit decline in the third quarter. Since the beginning of the year, FedEx has gained nearly 5.2%. Is the recent drop in its stock price an investment opportunity? Let’s find out.

Business snapshot

FedEx, incorporated in 1997, is a leading provider of transportation, e-commerce, and business services through different companies that operate under the FedEx brand. It has four main operating business segments: FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services. The majority of its revenue, $26.5 billion, or 62% of total 2012 revenue, was generated from the FedEx Express segment.

The FedEx Ground segment ranked second, with nearly $9.57 billion in revenue in 2012, while the FedEx Freight segment and the FedEx Corporation (NYSE:FDX) Services segment contributed $5.28 billion and $1.67 billion in revenue, respectively. In the FedEx Express segment, package revenue of $20.86 billion accounted for 78.7% of the segment revenue, while freight revenue was only $4.63 billion.

Growing performance on conservative capital structure

In the past ten years, FedEx has experienced a rising trend in both its top and bottom lines. Its revenue has increased from $22.5 billion in 2003 to $42.68 billion in 2012, while net income has grown from $830 million to more than $2 billion in the same period. FedEx also generated consistent positive operating cash flow in the past ten years, from $1.87 billion to more than $4.83 billion.

However, its free cash flow has fluctuated widely. Free cash flow has been positive since 2008 and was $828 million in 2012. What interests me is FedEx Corporation (NYSE:FDX)’s conservative capital structure. As of November 2012, it had $15.54 billion in total stockholders’ equity, $2.5 billion in cash and only $2.24 billion in long-term debt. The goodwill amount was only around $2.8 billion. Thus, FedEx’s tangible book value was $12.74 billion.

A disappointing quarter

In the third quarter of 2013, FedEx’s revenue increased 4% to $11 billion, but the net income came in at only $361 million, or $1.13 EPS (including this year’s realignment costs), 31% lower than the third quarter in 2012 at $521 million, or $1.55 EPS.

Frederick Smith, FedEx’s chairman and CEO said: “The third quarter was very challenging due to continued weakness in international air freight markets, pressure on yields due to industry overcapacity and customers selecting less expensive and slower-transit services. In response, beginning April 1, FedEx Express will decrease capacity to and from Asia and will aggressively manage traffic flows to place low yielding traffic in lower-cost networks.”