Today Wall Street Stock Forecaster Editor Patrick McKeough recommends a well-known stock that has been a target of speculation lately. Pershing Square Capital Founder Bill Ackman is seeking co-investors for a large investment in a public company, and while he has not named his target, he’s given enough hints that many suspect it is FedEx (FDX).
FDX rose 10% on the rumor, and while it has corrected slightly, it is still very near multi-year highs around $109 (highs set in March 2013).
But McKeough’s recommendation isn’t based on the new rumor. Instead, he’s focused on the company’s ongoing restructuring, which should accelerate earnings increases over the next few years. This is a good stock for long-term investors.
FedEx Corp. (FDX)
FedEx delivers packages and documents in the U.S. and over 220 other countries and territories. The stock has moved up in the past few weeks, partly due to speculation that activist investment firm Pershing Square Capital Management will soon make a significant investment in FedEx.
However, it seems unlikely that Pershing would be interested in FedEx, because it prefers underperforming firms that could spur their earnings by cutting costs. FedEx is already restructuring as more companies choose slower but cheaper delivery methods, like trucks and ships, over its more expensive overnight international air service.
FedEx’s restructuring involves upgrading to more efficient planes and cutting jobs. Costs related to this plan lowered its earnings by 23.2%, to $1.6 billion, or $4.91 a share, in its 2013 fiscal year, which ended May 31, 2013. In 2012, it earned $2.0 billion, or $6.41 a share. Without unusual items, earnings per share fell 5.5%, to $6.23 from $6.59.
Revenue rose 3.8%, to $44.3 billion from $42.7 billion. Revenue at FedEx’s Express international air delivery division (which supplies 61% of the total) rose just 2.5%. However, revenue at the Ground division (24%), which only operates in North America, gained 10.5%. Revenue from the trucking business (12%) rose 2.3%, while revenue fell 5.4% at the logistics and other services division (3%).
The company expects its earnings to rise by 7% to 13% in fiscal 2014. The midpoint of that range is $6.85 a share, and the stock trades at a reasonable 15.5 times that figure. FedEx’s earnings should increase more quickly when it completes its restructuring in 2015. The $0.60 dividend yields 0.6%.
FedEx is a buy.
Patrick McKeough, Wall Street Stock Forecaster, www.tsinetwork.ca, 888-292-0296, August 2013