He’s Calling For A Worldwide Recession

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It’s been a tough year for CEOs. Mark Zuckerberg has seen his net worth decline by $71 billion. 

Now, the new FedEx(FDX) CEO, Raj Subramaniam, is calling for a worldwide recession after his company announced an 11% reduction in global package and freight volume.

It’s no surprise that financial pros have made FDX the most searched freight and logistics stock over the last month. On the day the company announced its expectation for a recession, stocks plummeted.

With blood in the streets, is now an opportunity to get FDX shares for cheap, or is there more pain ahead?  

FedEx Corporation’s Business

FedEx Corp. (FDX) is the second largest publicly traded company in the express shipping category. The firm has over 550,000 employees, serving more than 220 countries and territories. FDX breaks down its business into the following segments: FedEx Express, FedEx Ground. FedEX Freight, and FedEx Services.

Despite FDX being one of the top players in its category, it has fallen victim to the recent economic climate. 

The firm announced it would increase its freight rates by an average of 6.9%-7.9%. Furthermore, its Q1 adjusted earnings of $3.44 per diluted share are down from last year’s $4.37.  

To combat these issues, FDX announced it would implement a cost-cutting program, which includes parking some of its plans and shutting some of its corporate offices, after seeing an 11% Y/Y reduction in global package and freight volume. 

Financials

From 2016 to 2022, FDX grew revenues by 86%. While it’s off to a rocky start for the fiscal year 2023, 2022 was a record year for revenues for the firm. 

However, its CEO has warned that the economy will enter a worldwide recession. 

To make matters worse, the company withdrew its full-year profit forecast. 

Despite shares being down more than 42% YTD, the company still boasts an impressive $4.60 annual dividend, a yield of 3%. 

FDX has $6.8 billion in total cash and $37.6 billion in total debt. However, it has a current ratio of 1.42x, indicating it has plenty of liquid capital to address its short-term liabilities. 

Valuation

Despite the company warning investors of its upcoming challenges, it’s currently trading at an attractive P/E GAAP valuation of 11x. And even it’s forward P/E ratio doesn’t look too bad at 9.99x. 

Over the last 3-years, its average P/E ratio has 40x. Furthermore, its P/E ratio is now lower than its largest competitor, United Postal Services (UPS), which trades at 13.2x. Other competitors in the space include ZTO Express (ZTO), C.H. Robinson Worldwide (CWRW), and XPO Logistics (XPO), all of which trade at higher P/E ratios except for XPO which trades at 6.3x. 

FDX now trades at a price-to-cash flow of 4.1x, significantly lower than its 5-year average of 9.3x. None of its competitors can match that. Its closest is XPO at 6.6x. Even more remarkable, FDX trades at a price-to-sales ratio of 0.41x, notably lower than its five-year average of 0.75x. The largest player in the space, UPS, has a current price-to-sales ratio of 1.4x. 

Profitability

FDX operates at a gross profit margin of 24.7%, which is better than all its competitors, including UPS, at 24.5%. 

Management at FDX announced the company would be increasing its freight rates to combat inflation. FDX has a return on equity of 14.5%, significantly less than UPS at 80.5% and CHRW at 55.3%. However, its EBITDA margin of 10.2% is better than CHRW at 5.5% and competitive with UPS at 16.6%. 

Growth

The pandemic helped shipping companies as fewer people visited stores and relied more on deliveries to get their goods.  

However, the state of the global economy plays a significant factor in future growth. 

While FDX has experienced 9.3% (YoY) revenue growth, the firm’s latest quarter showed a decline, and the company’s CEO expects the global economy to worsen. 

Its EBITDA growth of -17% is not a good sign, but it is worth noting this isn’t its first rodeo. The firm has been around for nearly 50 years and has dealt with economic slowdowns and recessions in the past.  

Our Opinion 6/10

FDX is one of the great American companies. Unlike some sectors like retail, e-commerce, and software, the barrier to entry is high in freight and logistics. FDX has been in business for nearly 50 years, and despite an expected economic slowdown, the company and its shares will bounce back. 

If you’re patient and believe we won’t be in a recession for too long, we think building a partial position at these levels can pay off in the future.