According to a number of 13F filings during the second quarter, various hedge funds were making bets on FedEx and a rebound in global shipping. FedEx Corporation (NYSE:FDX) provides guaranteed domestic and international air express, ground package delivery, heavy freight and logistics services. FedEx and United Parcel Service, Inc. (NYSE:UPS) have long been considered bellwethers for global economic performance. The earnings release by FedEx earlier today placed blame on a slower than expected rebound in the global economy, which has placed downward pressure on the company’s earnings.
However, a few big names had increased their stakes in FedEx during the second quarter, including such names as Israel Englander and Mason Hawkins of Southeastern Asset Management. Mason has over 5% of his 13F portfolio invested in FedEx. Jim Simons of Renaissance Technologies took a new stake in FedEx and increased his UPS position by 52%. It appears that Jim Simons is bullish on the strengthening of the global economy. Simons also increased his stake in another economy-dependent company, Caterpillar Inc. (NYSE:CAT), by 212% in the second quarter. See all of Renaissance’s holdings here. Caterpillar is expected to increase earnings by almost 10% based on 2012-2013 EPS estimates, but also released negative guidance earlier this month.
The FedEx 2013 guidance cut is based on customers seeking out cheaper shipping options, which may well continue into the near-term. FedEx was down over 3% on the poor guidance. Wells Capita’s chief investment strategist, James Paulsen, commented prior to the release that unless the numbers were really bad he did think a miss was a big deal, and also noted that it is really about what will happen next quarter.
For the latest quarter, FedEx reported EPS of $1.45 and profit of $459 million, down from $1.46 and $464 million from a year ago. The $1.45 EPS came in at the low end of the previously issued guidance of $1.45 – $1.60, but beat consensus estimates of $1.40. The company’s daily package volume fell 5% in the U.S. but rose 1% abroad on improvement in Europe and Asia. The company’s negative guidance includes full year EPS estimates between $6.20-$6.60, down from previous guidance of $6.90-$7.40. If the economy does show any signs of improving, shipping and transportation is likely to strengthen, but FedEx’s top competitor, United Parcel Service Inc., also cut full year guidance in July. The U.S. Board of Transport reported that total cargo (measured as revenue ton-miles) fell 4.9% during the first five months of 2012, with international down 7.7%, while domestic was up 2.7%.
As mentioned, UPS is FedEx’s top competitor, but the company also competes with the likes of C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) and Expeditors International of Washington (NASDAQ:EXPD). Looking at FedEx from a valuation standpoint: FedEx trades on the cheap side on a P/E and P/S basis, 14x and 0.7x respectively, but does pays a much lower dividend yield, only 0.6%. UPS trades at a 19 P/E and a 1.0 P/S, with a dividend yield of 3.1%. UPS is also over twice the size of FedEx as measured by market cap. The metrics for the other companies are: C.H. Robinson P/E of 21, P/S of 0.9 and dividend yield of 2.3%, and Expeditors P/E of 23, P/S of 1.3 and 1.5% dividend yield.
Asia and emerging countries will be the basis of support for the shipping companies going forward, namely air freight and shipping, with the key air freight companies being FedEx and UPS. Both companies have been increasing their presence in high-potential markets by adding facilities and flights. We believe that FedEx will be one of the few companies able to meet the demand of foreign markets, such as China. As well, they should be able to offset higher fuel costs with rate increases. FedEx expects to increase shipping rates by 3.9% for domestic services. The company currently trades at a 14 trailing P/E and an 11 forward P/E.