July 28, 2013 in Business

Motley Fool: Success, strategy give FedEx room to grow

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Associated Press photo

FedEx recently posted estimate-topping earnings.
(Full-size photo)

Shares of FedEx (NYSE: FDX), the world’s biggest air-freight company, have racked up a double-digit gain over the past year, but they have room to grow. FedEx has been dealing with sluggish economic conditions and high fuel prices by cutting costs and raising rates.

The company has been slimming down its air-transport network and has offered voluntary employee buyouts to reduce unnecessary staffing. Some don’t like its cutting flights to Asia (due to weak demand) or its strengthened focus on ground deliveries, as those moves might constrain growth and result in tougher competition, but the moves are likely to boost profitability. The company is replacing older aircraft with more fuel-efficient planes.

Meanwhile, the U.S. Postal Service may be a competitor, but it’s also a customer, with FedEx recently securing a seven-year contract extension worth $10.5 billion for airport-to-airport transportation of U.S. mail.

The long-term growth of e-commerce should boost FedEx’s business, as it delivers items ordered online. A threat, though, is a rise in same-day deliveries, featuring retailers working with companies such as eBay to offer faster service to customers.

FedEx recently posted estimate-topping earnings, though management tempered near-term expectations. The stock seems appealingly valued and is likely to appreciate over the coming years. (The Motley Fool’s newsletters have recommended FedEx and eBay.)

Ask the Fool

Q: Can you explain the difference between secondary offerings and subsequent offerings? – F.L., Chicago

A: The two terms are often assumed to mean the same thing, but they technically don’t.

Remember that a company “goes public” when it first issues stock via an initial public offering on the open market. At that time, it’s common for insiders or large investors to retain sizable ownership stakes, with only a portion of shares sold in the IPO. These big investors may later sell some of their (already issued) shares on the open market, via a secondary offering. At this point the investors collect the sales proceeds, not the company.

If the company later wants to raise more money, it can issue new shares, via a subsequent (or follow-on) offering. These new shares increase its number of shares outstanding, diluting the value of existing shares and often not delighting existing shareholders. Investment banks underwriting the issuance will get a piece of the action, as well. These days, subsequent offerings are often called secondary offerings, confusing matters.

Q: Warren Buffett’s mentor, Benjamin Graham, said, “In the short run the market is a voting machine. In the long run it’s a weighing machine.” What does that mean? – K.L., Escondido, Calif.

A: Graham was pointing out how from day to day, the stock market reflects the popularity of various stocks and the psychology of investors. Investors “vote” by buying and selling, sending prices up and down.

Over the long run, though, the popularity contest fades away and value is what matters. Stock prices ultimately reflect or approach the value of the underlying companies, based on their sales and earnings, and their potential growth. Focus on the long run.

My dumbest investment

My dumbest investment strategy involved how I managed my traditional IRA. I made contributions while working and deducted them from my income tax, as allowed. My mistake was not taking out more of my money before starting on Social Security. Now that I’m retired and a widower, I’m paying a lot in income taxes, as my IRA withdrawals triggered the taxation of my Social Security benefits. It’s worth warning people about this. – J.K.C., via email

The Fool responds: For many retirees, it can make sense to take big chunks out of your IRA early, while delaying taking Social Security. Yes, you’ll lose some appreciation potential in your IRA, but your deferred Social Security benefits will increase by about 8 percent (for most of us) annually up to age 70, delivering a sizable guaranteed return and boosting your ultimate payout a lot.

Everyone’s situation is different, though, due to marital status, earnings history, life expectancy, risk tolerance and other considerations. Run the numbers yourself or consult a financial planning pro for guidance. You can learn more at fool.com/retirement, too.


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