Reasons for a Bullish Outlook on FedEx

FedEx Corporation (FDX, Financial) is a leader in global express delivery services, which provides guaranteed domestic and international air express, residential and business ground package delivery, heavy freight and logistics services.

Mason Hawkins' Southeastern Asset Management has a big position on the stock. The stake contains 5.4 million shares valued at $897.5 million as of March 2015, and represents 5.63% of his portfolio.Â

Catalysts

The competitive advantage has been improved due to increased capacity to handle the additional modes of shipping. After investing in assets (in U.S. and internationally), the company can handle most modes of transport.

When looking at barriers to entry, the massive network of FedEx international shipping would be difficult and expensive to replicate.

Through history, the firm has survived several economic cycles and oil supply crises, mainly due to its capacity to adapt to different scenarios. The strategy of realigning its express fleet capacity had good results in order to match demand.

In international operations, FedEx is expanding in the Indian economy. Further, other promising regions such as Brazil, China and Mexico will improve its competitive position.

Revenues, Margins and Profitability

Looking at profitability, revenues increased by 2.32% but earnings per share decreased dramatically in the fourth quarter compared to the same quarter a year ago (-$3.16 vs $2.46).During the past fiscal year, the company reported lower earnings of $3.60 versus $6.79 in the previous year. This year, the Street expects an improvement in earnings ($10.88 versus $3.60).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a current ROE of 6.83% which is lower than the industry median and the one exhibit by Atlas Air Worldwide (AAWW, Financial) and Park-Ohio Holdings (PKOH, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, United Parcel Service (UPS, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

Relative Valuation

In terms of valuation, the company sells at a trailing P/E of 47.1x, trading at a premium compared to the industry mean.

In the table above we can see that the stock is relatively overvalued when compared to its peers.

Final Comment

FedEx has several drivers such as international opportunities, higher expected international volumes and its capacity to adapt to different macro scenarios. We believe the firm could exploit its competitive advantages in the future, despite the challenges of fuel price shocks and global economic cycles.

The stock's performance in a year-to-date basis is negative 3.09% but in the 12 past months the stock has done well achieving a return of 10.2%. Yahoo! Finance estimates a one-year target share price at $196.92. In addition, investors will be paid a dividend of $1.00 at the end of the year, yielding 0.6%. Dividends have been paid since 2002 and consistently increased dividends every year. According to Marketbeat, the one year target price is $200.87, with 19.21% upside potential. A long position of $10,000 five years ago today represents $23,342, or an 18.5% compound annual growth rate.

I would recommend investors to consider adding the stock for their long-term portfolios and the fact that hedge fund guru Ken Fisher (Trades, Portfolio) has added the stock in the second quarter of 2015 makes me feel comfortable.

Disclosure: Omar Venerio holds no position in any stocks mentioned.