Bullish on Fedex
Interview: Morgan Keegan---Hatfield, Arthur (Art)---Analyst
>> citigroup chairman and former chief executive sanford weill took home five times as much money 2003 as he did in the prior year. citigroup paid him $29 million bonus as well as $1 million in salary and gave him options $14 million. the company paid new c.e.o. charles prince $7 million in bonus and awarded him $19.2 million worth of restricted stock and robert rubin received $10.25 million last year. management changes at worldcom, the long-distance company named nicholas katzenbach chairman, former u.s. attorney general and undersecretary of state. worldcom alsos the current president is leaving. mike capellas will succeed as president. worldcom is preparing to exit the largest bankruptcy in u.s. history. our next guest will tell us why he’s bullish on fedex, expecting it to rise to $80 a share some time this year. arthur hatfield, analyst with morgan keegan joins us now from memphis, tennessee. thank you very much for coming in. i appreciate your joining us, arthur. why do you see this stock going from $68 to $80 and in what time frame?
>> i think over the next six to 12 months that can occur and the driver will be improving profitability from the company. over the last couple of years, the company’s done an excellent job of restructuring their businesses to get their cost structures lower and as we see the economy improving over the last couple of years, some of their more deferred transportation businesses have done well. i expect as we’ve seen manufacturing pick up in the last couple of months, we should see both their domestic and international express businesses accelerate, which should drive profitability to much higher levels over the next 12 months which should drive the stock price to that type of level in that time frame.
>> however, unlike you, just a little over half of the analysts that follow fedex rate it a hold or sell. what are they worried about that you’re not?
>> i think they’re worried about the company’s capability in achieving the higher levels of profitability. they probably also look at the company from a historical perspective with regards to valuation. we’re comping the company relative to its peers and it trades at a discount to its nearest competitors and as such, this company is in a mode of improving its operating margins to a greater degree than its competitors are and we see that valuation discrepancy closing and as such, the stock price should rise.
>> the discount measured by what?
>> from a p.e. perspective relative to its closest peers.
>> forward p.e.?
>> forward p.e., correct, on the earnings outlook. over the next couple of years. it’s trading anywhere between 20% to 30% discount to its peers and we don’t think that kind of discount is justified. something in the low teens is probably more practical given the fact that u.p.s―or, excuse me, fedex is closing the profitability gap that it has relative to those competitors.
>> let’s get specific about the numbers coming out, the fiscal third-quarter estimate, average estimate is for 67 cents a share, up from 50 cents a year ago. sales are expected to hit $5.8 billion. where do you fall in line and what do you see as the probability for surprise tomorrow?
>> we’re at 69 cents and as you said, the consensus estimate is 67. the company has given guidance in a range of 60 to 70 cents. we’re pretty comfortable in believing it will be towards the higher end of that range. i think a good probability is it will be between 65 and 70. one of the things to keep in mind about the big earnings increase over last year is that about half of the increase, roughly eight to nine cents, is coming from a restructuring that the company did last year with regards to early retirement and voluntary severance programs so that eight to nine-cent gain is the accrued savings from those people leaving the company. so we’re very comfortable thinking it’s going to be at least where the street is looking and possibly a little bit higher.
>> when we look at the earnings actually for the last six quarters, the company typically doesn’t surprises either by sales or profits. on an earnings per share basis, the average surprise is only 1.2% over six quarters so they pretty much hit or deliver, no surprises.
>> yes and they’ve done a good job giving good guidance ranges. if you look back, the company has given ranges similar to what they’ve given this quarter and they’ve typically come in at the higher end of that range and we don’t see anything different this quarter relative to what they’ve done over the last six quarters as they don’t vary very much from the street’s estimates.
>> arthur hatfield, we appreciate your information. he’s an analyst with morgan keegan and we’ll get those numbers from fedex before the market opens tomorrow. j.p. morgan economist james glassman says a new approach to monetary policy is underway and he says it’s needed. he’ll tell us why preempting inflation is no longer the fed’s top priority.
