(MONEY Magazine) – Not so long ago, FedEx was a prime example of why you shouldn't value a stock based solely on reported earnings. In 2001 the express-delivery icon reported earnings of $584 million, yet lost $69 million in free cash flow--the money actually going in and out of a company's coffers. What happened to the profits? To keep growing, FedEx had to plow much of its profits back into new planes, trucks and warehouses.

Having upgraded its infrastructure, though, FedEx has now trimmed capital expenditures, allowing more revenue to reach the bottom line; a cost-cutting campaign has helped too. Merrill Lynch analyst Ken Hoexter expects FedEx to record $976 million in free cash flow in the fiscal year that ends May 31, a threefold increase from the previous year. Money manager Steve Goddard, who has 4% of his New Market Fund in the stock, adds that FedEx is one of the few big companies with the ability to raise prices.

So what's FedEx doing with its cash? It has started paying a dividend, repurchased stock and recently acquired copy chain Kinko's for cash and debt instead of stock. Says Goddard: "The fact that management didn't just issue new shares tells me they think the stock is still undervalued." --JON BIRGER