Why This Parcel Company Should Continue to Deliver
When it comes to long-term investing, you want to go with proven management teams -- and delivery service FedEx falls into that category. While the global economy clearly isn't in full swing, that's exactly why long-term investors should stick with sound names like FedEx. Its management has made several creative moves to help the business grow, and boost shareholder gains in the process.
Unfortunately, the easiest way for most companies to cut costs and increase profits is to reduce headcount. This can give companies a bad reputation, but for public operations, shareholders come first.
FedEx doesn't indicate how many employees it aims to cut, but it does aim for a goal of $400 million in coast savings via staff efficiency over the next three years. This is part of the company's plan of increasing profitability by $1.7 billion over the same time frame, which also includes $300 million in savings in more fuel-efficient planes, and replacing up to 5,000 vans for more fuel-efficient options.
The reason FedEx can't offer a specific number on headcount reductions is because it made a wise and strategic move: offering employees a voluntary severance program. In the first quarter, 5% of employees accepted the voluntary cash buyout -- a percentage that's expected to increase throughout the year.
FedEx doesn't just expect growth on the bottom line for the second quarter and the remainder of the year, but on the top line as well. FedEx Ground has been the key driver thanks to strong demand. And further improvements are expected in its Express and Freight divisions. On July 1 of this year, Freight implemented 4%-5% general rate increases, and in 2014, Express shipping rates will jump 3.9%.
These are all positive developments that have good potential to lead to shareholder returns. Additionally, FedEx recently reaffirmed its full-year EPS growth guidance of 7%-13%. Even if bottom-line growth came in at 7%, it still demonstrates the company's ability to improve the bottom line in a challenging economic environment.
The company's biggest concern lies with customers opting for cheaper shipping alternatives. They're willing to wait longer for their shipments if it costs less. However, FedEx has still managed to grow on the top and bottom lines in a challenging economic environment over the past several years.
To further demonstrate FedEx's ability to grow its bottom line during challenging times, consider its five-year performance compared to peers, United Parcel Service and Roadrunner Transportation Systems :
FDX EPS Diluted TTM data by YCharts
FedEx has also outperformed UPS on the top line over the same time frame. And if you're looking for a growth play in Air Delivery & Freight Services, notice Roadrunner Transportation Services' consistent performance on the top line over the past several years:
FDX Revenue TTM data by YCharts
Like FedEx, UPS is making many cost-efficient moves. For instance, it plans to add 700 liquefied natural gas vehicles. UPS Chairman and CEO Scott Davis stated: "LNG will be a viable alternative transportation fuel for UPS in the next decade, as a bridge between traditional fossil fuels and emerging renewable alternative fuels and technologies that are not quite ready for broad-based long-term commercial deployment." With natural gas prices 30%-40% lower than imported diesel, this move should aid the bottom line.
UPS isn't neglecting the top line, either. It recently introduced UPS Worldwide Express Freight, which guarantees door-to-door delivery by the end of the day in the United States, by the next business day in Canada, within two business days to Latin America and Europe, and within two-three business days to Asia. This could increase demand from people and businesses that require expedited service.
FedEx and UPS are both highly focused on cutting costs to improve the bottom line, which should lead to positive investor returns. However, there's one big difference between FedEx and UPS that investors should consider. You might be able to spot it in the chart below:
Roadrunner Transportation Services
FedEx's debt-to-equity ratio is well below the industry average of 0.70, indicating strong fiscal discipline. UPS's debt-to-equity ratio is well above the industry average, showing that UPS isn't as adept at managing debt at FedEx. This debt has the potential to impede UPS's growth potential in the future due to interest expenses.
Getting back to Roadrunner Transportation Systems, it's a much smaller company than FedEx, but as noted above, it's seeing strong top-line growth. It also expects Q3 revenue growth of 27%-36% year over year, and for diluted EPS to come in at $0.36-$0.39, versus $0.31 in the year-ago quarter. The company primarily aims to grow through geographic expansion and pricing improvements.
Delivering slow and steady returns
If you're looking for fast growth and you're risk-tolerant, then you might want to take a look at Roadrunner Transportation Systems. However, if you're more of a Foolish investor, and you have a long-term time frame in mind, then FedEx and UPS should both present quality long-term investment opportunities thanks to their efficient cost-cutting strategies, which will aid their bottom lines. However, FedEx's superior debt management makes it more appealing.
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The article Why This Parcel Company Should Continue to Deliver originally appeared on Fool.com.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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