Even after all these years, I find it interesting to see which stories analysts and investors are willing to believe in, even when the fundamentals don't always support that belief. I don't believe that anybody seriously questions that FedEx (NYSE:FDX) is a well-run business, or that it would be very (if not prohibitively) expensive to replicate the infrastructure that it and rival UPS (NYSE:UPS) have built.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers

By the same token, the company has had a hard time producing a truly impressive return on invested capital, and the company's free cash flow generation capabilities have always been limited--maintaining that network of planes, trucks and so on takes a lot of capital. Looking at the company's fiscal fourth quarter earnings, it looks like investors are willing to give the company another pass--margins and volumes were not that exceptional (nor was guidance), but the performance wasn't as bad as the results of other transportation and logistics companies might have suggested.

Decent, but not Great, Fiscal Fourth Quarter Results
FedEx reported a slight top-line miss for its fiscal fourth quarter, as sales climbed about 4% from last year. Revenue growth was led by solid high single-digit results from Ground (up 9%) and Freight (up 7%), while Express rose 3%. Volumes were a little soft in spots, particularly in the international priority and ground businesses, though FedEx's SmartPost initiative seems to be going well (volume up 16% on a 7% increase in yield).

Pricing was pretty solid and FedEx did a good job of managing expenses. While reported operating income didn't look so great due to some charges tied to retiring planes, adjusted operating income rose nearly 12%. Express was a bit soft (even on an adjusted basis) at negative 3%, while ground and freight showed very solid improvements.

SEE: Zooming in on Net Operating Income

Getting Serious About Costs and Efficiencies?
I think it's encouraging to see that FedEx management is getting more serious about cutting costs and improving asset utilization. The company has announced a reasonably extensive program to retire some aircraft, and though the company will offset some of this with new Boeing (NYSE:BA) cargo planes (so it's not going to cut as much capacity as it may appear), they should see lower maintenance and fuel expenses.

Hopefully this is the just the beginning. Management apparently has engineers and other employees at work poring over the company's operations with an eye towards a more comprehensive restructuring plan for this fall. This will almost certainly involve firing workers, but it will hopefully also examine overall network utilization with an eye towards running a tighter ship.

SEE: 6 Surprising Ways Oil Prices Affect You

Guidance Seems Conservative
The guidance that FedEx laid out for the next fiscal year was not especially strong; a less-popular company would likely have seen a pretty negative reaction. That said, it does look conservative. It doesn't seem as though management is banking on a significant pick-up in the economy, nor any substantial near-term cost savings.

Likewise, while management just put through another less-than-truckload rate increase and fuel costs have been coming down, it doesn't seem like management has to hope for much good luck to meet these numbers.

Still a few notes of caution are in order. Neither Expeditors (Nasdaq: EXPD) nor UTi Worldwide (Nasdaq:UTIW) have given investors much reason to feel good about international trade activity. Likewise, investors may still find better transport plays either in well-run growth stories like Old Dominion (Nasdaq:ODFL), dividend plays like SeaCube (NYSE:BOX) or riskier turnarounds like SeaSpan (NYSE:SSW).

The Bottom Line
Investing sometimes requires you to hold simultaneous viewpoints that are at least partially contradictory, and FedEx is a good example. While this is a very good company (and "good companies" often do well), the company's low free cash flow margins and low returns on capital are impediments to long-term value creation--and the stock has lagged the S&P 500 over the last five years.

I hold some optimism for the company's restructuring efforts, but I will need to see more specific numbers before I'm inclined to lift any of my long-term assumptions. As a result, though I acknowledge FedEx is popular and could catch a tailwind on signs of an improving global economy, I just don't see the shares as undervalued on a fundamental basis.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center