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Has FedEx Become the Perfect Stock?

Sunday - 1/20/2013, 9:30pm  ET

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide if FedEx fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at FedEx.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

3.6%

Fail

 

1-year revenue growth > 12%

5.2%

Fail

Margins

Gross margin > 35%

25.3%

Fail

 

Net margin > 15%

4.5%

Fail

Balance sheet

Debt to equity < 50%

14.4%

Pass

 

Current ratio > 1.3

1.90

Pass

Opportunities

Return on equity > 15%

12.5%

Fail

Valuation

Normalized P/E < 20

16.18

Pass

Dividends

Current yield > 2%

0.6%

Fail

 

5-year dividend growth > 10%

7.1%

Fail

       
 

Total score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at FedEx last year, the company has held onto the point it gained from 2011 to 2012. The stock hasn't moved very quickly, though, rising between 5% and 10% over the past year.

FedEx and UPS have done an effective job of creating what amounts to a duopoly in the U.S. shipping business. Although the Postal Service has done its best to compete, the two leaders have become huge players in the shipping opportunities that the rise of e-commerce has brought to the industry. UPS has a bigger share of the business right now, but given the failure of UPS's buyout of Europe's TNT Express, FedEx has a chance to hit its rival while it's down.

Yet FedEx has had to face some business obstacles. In its most recent quarter, the company saw profits drop 12%, falling short of expectations because of the impact of Hurricane Sandy as well as global economic sluggishness. Moreover, with guidance also a bit weaker than analysts had hoped, it's clear that the global recovery isn't proceeding as fast as FedEx would like.

One interesting part of the business that doesn't get much attention from investors is the FedEx Office segment. The former Kinko's business has been a thorn in the side of office-supply retailers Staples and Office Depot , both of which rely on high-margin printing services to drive traffic and revenue. For FedEx, FedEx Office also provides an incentive for printing customers to use its shipping services.

For FedEx to improve, it needs to work on bolstering growth and getting its dividend up in line with the higher yields that UPS produces. If it can succeed at that, then FedEx has the potential to get closer to perfection in the years ahead.

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