Why FedEx can fly and Disney will settle down

NEW YORK (Money) -- As the blue-chip stock indexes rally, many big high-quality growth stocks are perking up. As they do, investors have to determine which stocks still have substantial room to advance.

To make that decision, shareholders should assess whether a company's growth is sustainable over the long-term - five years or longer.

Disney and Federal Express are an illuminating pair of companies. Analysts who follow the companies closely are divided on Disney's prospects. But Federal Express appears to have much clearer opportunities for growth.

Disney (Charts) reported stellar results last week for the fiscal year ended Sept. 30. Earnings per share were up a stunning 89 percent for the quarter and 34 percent for the year.

Profits were up strongly at Disney's cable networks, particularly at ESPN, which enjoyed higher advertising revenues. Income also increased at the ABC Television Network and Touchstone Television, thanks to higher advertising rates, syndication revenues and DVD sales for hit shows like Grey's Anatomy and Desperate Housewives.

Earnings from parks and resorts also showed strong gains.

Despite this impressive performance, analysts question how much further upside Disney shares offer. The Disney movie studio and consumer products had little revenue growth over the past year.

In addition, Disney's May acquisition of computer-animation studio Pixar may offer excellent growth opportunities over the long term, but is a drag on earnings at the moment.

In addition, while ad sales could continue to improve at ABC, there's probably a limit to how fast theme parks and the movie studio can grow. Overall, Disney's core growth rate is projected at less than 13 percent annually. And the shares yield less than 1 percent.

At $32.26, however, the shares are at a five-year high and trade at about 18 times estimated earnings for calendar 2007. That's a fair price, but it doesn't give investors much hope for big returns.

FedEx, by contrast, appears to have the kind of open-ended potential that long-term growth investors are looking for.

FedEx (Charts) has a very successful basic business, including air express and ground shipping. Over the past decade, growth in earnings per share has greatly exceeded that of the average stock.

The company is now also benefiting as oil prices come down. FedEx charges customers a fuel surcharge, and as that is reduced, FedEx can increase rates slightly. The company expects to raise rates 3.5 percent in 2007.

International growth opportunities are even greater. On Monday, Citigroup recommended the stock, based on opportunities particularly in China and India.

Two other factors could contribute to FedEx's long-term growth in earnings per share. First, the company generates billions of dollars of cash flow, which can be used to buy back shares.

In addition, FedEx is still trying to raise returns at its Kinko's copying and printing chain, acquired in 2004. So far, the improvements have been inadequate, but Kinko's does offer the potential for a big upside swing at some point.

Overall, analysts project growth in earnings per share at 15 percent annually over the next five years. Moreover, at $115.41 the shares trade at 16 times earnings for the 2007 calendar year (the fiscal year ends in May). So FedEx not only has a higher growth rate than Disney, it's also cheaper.

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