FedEx (NYSE:FDX) reports earnings for the quarter ending Aug. 31, 2011, on Thursday. With oil prices lower in the period, look for a strong report from this vital transport company.
The transportation industry is a leading indicator of economic activity. Weakness from FedEx will reinforce the current bear argument that the economy is heading toward a double-dip recession. A strong report should have the opposite effect. For at least a day, investors will be able to focus on data other than speculation of foreign debt problems in Europe.
For FedEx earnings over the past four quarters have been a mixed bag:
The company missed analyst estimates in three of the four quarters, but beat estimates in the most recent quarter reported ending May 31. The May 31 report was impressive in that oil prices were rising during the period and should have been a bigger drawback on profits.
Amid the strong recent report, estimates for the current period have been on the rise. The average Wall Street estimate is for the company to make $1.48 per share. Ninety days ago, the estimate stood at $1.41 per share. For the full year ending May 31, 2012, FedEx is expected to make $6.47 per share. In the prior year, the company made $5.06 per share.
At current prices, FedEx trades for 15 times trailing earnings and 12 times forward earnings. Since the start of the year, shares of FedEx have dropped 18.5%:
It has been a tough year for FedEx. A slower economy than many expected and higher jet fuel prices have weighed on the company. Operating performance has been subpar during the past year. A strong report in the last period provides some hope for the future.
With the stock down significantly, FedEx is priced quite cheaply compared to expected growth. It has been my experience that owning stocks that trade for a multiple of earnings less than profit growth is a profitable strategy.
Shares of FedEx gained nearly 3% after it last reported earnings. Since that time shares have dropped significantly. I’m not sure much has changed to merit the selling. UPS maintained guidance despite worries of a slowing economy. At the same time, lower jet fuel prices should help profit margins.
A low valuation is the nail in the coffin. I would buy this stock before it reports results, and I am looking for a gain of 3% to 5% in the stock after the report.
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