Why Financial Pros Say FedEx is a Winner

FedEx didn’t please the street with its quarterly earnings in December.

The company delivered lower volume and revenues, and forecast ongoing weakness.

But beneath the sour headlines is a story of a company quickly improving its cash flow.

And that’s caught the attention of financial pros, according to our Trackstar Data.

FedEx is one of the world’s largest shipping companies by volume. And even small margin improvements can deliver huge wins for shareholders.

So, what exactly are they planning?

FedEx’s Business

Renowned for its overnight courier services, FedEx excels in freight, logistics, and business support with operations that span over 220 countries.

This company single-handedly turned Memphis, Tennessee, into the second busiest airport in the world measured by cargo handled.

FedEx handles over 6.5 million packages daily, making it the largest express transportation network in the world.

Revenues broken down by services

Source: FedEx Q2 2024 Investor Relations

Most of us have interacted with their Express or Ground services.

Freight handles less-than-truckload shipments, while Services provides support services from sales to IT.

Although holiday sales appear strong, FedEx reported a decrease in Q2 revenues YoY by 2.6%, driven by lower volume. Ground was the only segment to see revenues increase in the quarter.

Source: FedEx Q2 2024 Investor Relations

FedEx is working to adjust its workforce to streamline operations while meeting customer demand. This helped it increase net income YoY despite revenue declines.

Financials

Source: Stock Analysis

Although the latest quarter presented challenges, FedEx finally tackled its Capex spending problem.

Management guided towards lower Capex, which had run as high as $6.7 billion and exceeded operating cash generation from 2017-2020.

In 2020, total debt skyrocketed from $17.6 billion to $36.1 billion. However, this came from a change in accounting standards, which changed capital leases to debt, adding $13.8 billion to its debts and assets.

Still investors had been concerned the company wasn’t prudently managing capital.

FedEx is now generating $3.9 billion in free cash flow, more than enough to cover its $1.0-$2.0 billion annual stock buybacks and $1.2 billion annual dividend, which yields 2.0%.

Valuation

Source: Seeking Alpha

Relative to its peers, FedEx is fairly cheap, trading at just 14.8x forward earnings, 0.7x sales, and 6.4x cash.

United Postal Service (UPS) trades at 18.8x forward earnings and 12.1x cash, while JB Hunt (JBHT) trades at 27.7x and 10.7x on those same metrics respectively.

That makes FedEx half as cheap on an earnings basis relative to a traditional carrier (JB Hunt) and half as cheap on a cash basis relative to a similar competitor (UPS).

Growth

Source: Seeking Alpha

Given its discount, you’d expect FedEx’s growth to be abysmal. And while its revenue trends aren’t great, they’re not much worse, if at all, than its peers.

Heck, Expedited Shippers (EXPD) saw revenues chopped in half last year.

And as we noted earlier, FedEx significantly improved its free cash flow generation.

Profitability

Source: Seeking Alpha

While FedEx runs higher gross margins, its EBIT margins aren’t near the bottom. And its net income margins are dead last.

We’re also not overly impressed with its return on assets or total capital. But those appear to be improving.

Our Opinion 7/10

This is a conundrum.

We want to rate FedEx higher, given its progress towards fiscal restraint and revenue consistency relative to its peers.

However, the industry isn’t growing. 

So, although we like FedEx, even at these high prices, we’d be cautious about initiating a large position here.

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