Fed Ex Beginning To Look Expensive
Fed Ex (FDX) is white hot, and there's a reason we've been telling investors to buy the stock for the last 2 weeks.Fed Ex hit another 52 week high this morning after getting upgraded by Bear Stearns.
Fed Ex is an indisputable leader in the global business-to-business express delivery space.The firm is aggressively expanding (breaking further into the home delivery category) and cutting costs. We'd like to see management make better use of shareholder capital, nevertheless.
Although UPS (UPS) isn't as levered to the air cargo & freight business (which demands higher Cap Ex and fluctuates accordingly with fuel spikes), it's clear that investors are optimistic about Fed Ex's ability to compete with its long time arch-nemesis, even as UPS sustains its higher margin categories and maximizes profitability from its European operations.
At the level they're currently trading at, shares of Fed Ex are arguably rich. Although we like Fed Ex as a play on robust global growth, a sudden return to $70 crude (Fed Ex has large fixed operating leases tied to aircraft) could hammer shares to the $85 level, where we think they are faily valued. Our estimate applies a larger than usual discount rate to accomodate for violently reactive oil prices, as well as the potential for a price war scenario.
Other risks: competition with UPS (technically a more efficient animal, as it spits out a 23% ROE compared to FedEx's 16%) remains heavy, and Fed Ex's new pricing policies could turn away customers. Moreover, Fed Ex's overnight volume lead over UPS isn't as wide as it used to be. Last but not least, Fed Ex holds gargantuan pension obligations that could theoretically punch the stock in the teeth once Fed Ex sees its employees ride off into the sunset.
On a pullback, shares of Fed Ex could be tempting. Today, however, we'd take profits.
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