Big acquisition plus e-commerce gains enhance profits for this stock

The expansion of online shopping is just one reason this company continues to increase its profits.

This U.S. firm also carried out a major acquisition that makes it the second-largest shipping courier in Europe. Although new tariffs on goods traded between China and the U.S. raise concerns, the company is investing in upgrades and extending its delivery hours in the U.S. It also raised its dividend earlier this year.

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FEDEX CORP. (New York symbol FDX; began offering air-delivery services in 1973, under the Federal Express banner. It’s now one of the world’s largest shipping firms: It delivers packages and documents in the U.S. and 220 other countries through a fleet of 660 planes and 170,000 trucks and other ground vehicles. It processes over 14 million shipments a day.

The company has three main businesses: FedEx Express (59% of revenue, 45% of earnings) offers air-delivery services; FedEx Ground (30%, 46%) provides ground-delivery services in the U.S. and Canada; and FedEx Freight (11%, 9%) specializes in less-than-truckload shipping, which combines freight from multiple customers onto one vehicle.

On May 25, 2016, the company completed its $4.9 billion acquisition of TNT Express NV. That Netherlands-based courier operates across Europe. The deal makes FedEx the second-largest courier on the continent after United Parcel Service.

If you exclude costs to integrate TNT and the impact of changes to the U.S. tax code, the company’s earnings for the fiscal 2019 first quarter, ended August 31, 2018, jumped 36.6%, to $933 million from $683 million a year earlier. Due to fewer shares outstanding, per-share earnings rose 37.8%, to $3.46 from $2.51.

However, the latest earnings were below the consensus estimate of $3.80 a share. That’s mainly because the company increased its employees’ wages as a result of its reduced tax bill.

Revenue in the quarter rose 11.5%, to $17.05 billion from $15.30 billion a year earlier. That beat the consensus forecast of $16.83 billion.

Blue Chip Stocks: 4 million extra packages a day attributed to rise in e-commerce

The company has also profited from rising online shopping volumes, which have spurred demand for its delivery services. In 2018, its Express shipping volumes rose 2.6% from 2017.

FedEx plans to expand its ground-delivery operations in the U.S. on a permanent basis to six days a week from five. It will continue to deliver packages seven days a week during the busy holiday shopping season.

The expanded schedule is due to rising demand for e-commerce: FedEx handled 10 million packages a day 10 years ago; it now handles 14 million packages a day.

The company’s investments over the past few years in new facilities and robotic sorting equipment have helped it cope with the higher volumes and keep its costs down.

Due to those rising volumes, FedEx continues to invest in new planes, trucks and other equipment. It will probably devote $5.6 billion to those upgrades in fiscal 2019. That would represent a slight decrease from $5.7 billion in 2018.

The company will also spend $1 billion to modernize its main hub in Memphis, Tennessee. That facility processes around 47% of its total volume. FedEx will also invest $1.5 billion to expand its hub in Indianapolis, Indiana. The upgrades will take several years to complete.

New tariffs on goods shipped between the U.S. and China could slow FedEx’s revenue growth. Even so, savings from the TNT integration and lower taxes should let the company earn between $17.20 and $17.80 a share for all of fiscal 2019. That’s up from its earlier forecast of $15.85 to $16.45 a share. The stock trades at a reasonable 12.3 times the midpoint of the company’s new range.

Starting with the July 2018 payment, FedEx increased its quarterly dividend by 30.0%. Investors receive $0.65 a share instead of $0.50 a share. The current annual rate of $2.60 yields 1.2%.

Recommendation in Wall Street Stock Forecaster: FedEx is a buy.

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