FedEx Is Stupid Cheap

It sounds a bit weird to say that a +$60 billion company is cheap.

Yet, that’s exactly how we would describe FedEx (FDX).

With earnings scheduled for March 17, we expect FedEx to outperform the market over the next year.

Even though it’s the second most searched integrated freight and logistics stock amongst financial pros, we expect that volume to pick up as we near March 17.

You see, FedEx is already down +20% from its all-time highs last April while United Postal Service (UPS) made new all-time highs last week.

In fact, FedEx trades below its highs from 2016 to 2018.

Now you might think that signals relative weakness.

But for a company trading at less than 13x next year’s earnings and 7x next year’s cash flow, we see it as a discount.

And pricing power allowed the company to increase rates an average of 5.4%, which we expect to help maintain margins.

Here’s how it all fits together.

FedEx’s Business

Headquartered out of Memphis, Tennessee, FedEx Corp is a global leader in logistics and deliveries across various segments.

The company reports through four main categories:

Express offers time-definitive delivery to more than 220 countries and territories around the world.

Ground offers low-cost, day-certain services in the U.S. and Canada, as well as residential delivery in the U.S. through FedEx Home Delivery services.

Within the ground segment, FedEx offers SmartPost that focuses on consolidating and delivering high volumes of low-weight, less time sensitive business to consumer packaging.

FedEx Freight accounts for less-than-truckload freight transportation. Interestingly, FedEx has grown from <10% of the LTL market share by revenue to closer to 18%.

Earlier, we mentioned the price increases management plans to implement in 2022. 

The chart below breaks these out by the different segments.

Lastly, we want to highlight management’s long-term financial goals. These are important given what we expect to be a profitable, yet challenging environment in the coming years.

A 10%-15% EPS growth per year for a company of FedEx’s size would be huge as would a +10% operating margin.

We like to see the focus on both improving cash flows and returning value to shareholders.

Financials

Revenue-wise, FedEx has a 10-year average growth of 7.89%, which was barely down in 2020 before accelerating to 21.3% in 2021.

That’s on top of a net income 10-year average growth of 13.67% and EPS of 15.58%.

Interestingly, margins slipped in more recent quarters from the high water mark in May of 2021, but are still above historical averages.

That’s why the company’s focus on a +10% operating margin could be a huge boon to shareholders.

The Digital Currency Summit 2022. During the event, 47 of the world’s top crypto experts will share their list of the best investments for the current crypto market. Including the hottest altcoins expected to hit record highs this year. These experts believe crypto is the #1 wealth-building opportunity of 2022.

Click here and reserve your spot now.

Notably, in 2021, operating cash flow nearly doubled while free cash flow went from -$771 million to +$4.251 billion, a huge swing.

While that’s tempered a bit, forward estimates still put FedEx’s cash flows at ~$9.31 billion.

We’re also delighted to see capital expenditures come down as a percentage of revenues.

That shows management’s tight fiscal control in place to keep cash flows growing.

Lastly, we want to highlight the company’s long-term debt of $20.4 billion and capital leases of $13.96 billion compared to the $6.83 billion in cash on hand.

While those levels are a bit high, with the amount of cash generated each year, they don’t place a heavy burden on the balance sheet.

Valuation

To demonstrate how cheap FedEx is, we threw it up against the top search results from our proprietary data.

Starting off with basic valuation measures, FedEx trades at a discount to all its peers with the exception of XPO Logistics (XPO), which is a bit less expensive on the price-to-sales ratio, price-to-cash flow, and enterprise value to sales.

However, when we look at the growth metrics, we find more reasons to be bullish about FedEx than XPO.

Although YoY revenue growth was phenomenal for XPO, analysts forecast negative growth going forward.

And when you look back at the compounded annual growth over multiple years, FedEx does much better with the exception of net income and EPS over the last 3-years which was impacted by poor performance in 2019 and 2020.

We think a key selling point for FedEx is the company’s relative profitability.

Compared to its peers, FedEx boasts the highest margins in nearly every category with the exception of net income and EBITDA. And even then it’s still just slightly lower.

Our Opinion – 8/10

FedEx is a fantastic company with a strong vision for the future.

Like others, they face labor headwinds and cost challenges. Yet, management’s focus on margins should keep these in line until external pressures ease. And that’s when the real climb in shares should begin.