FedEx Chased By Bulls: Buy Rating Fueled By Earnings And Dividend Growth (NYSE:FDX)

Stock Overview

In today’s research note, I’ll be covering FedEx (NYSE:FDX), within the air freight and logistics sector, headquartered in Tennessee and trading on the NYSE.

What sticks out to me about this company and I why I picked it for today’s note includes some key facts from its website that my readers may or may not know: 40 FedEx ground hubs, 13 air express hubs, over 2,000 FedEx Office locations, and a really big number.. 16.5M in average daily package volume.

FedEx also goes beyond just shipping or retail locations and dives into the field of data insights and supply chain digitization through its FedEx Dataworks division.

With that said, I see it as a company penetrating everything from ground, air, and retail, with a very strong brand recognition as well, as its trucks and aircraft are a common sight on highways and at airports across America.

Rating Methodology

The stock’s rating is based on its WholeScore, which is my approach to holistically rate a stock by considering 13 metrics of equal weight that I think are relevant to investors and analysts. Key financial data presented is sourced from Seeking Alpha as well as the company’s recent fiscal year 2024 1st quarter earnings release that came out on September 20th.

Revenue Growth vs Peers

The following table is a list of comparable stocks in this sector to compare against each other’s YoY revenue growth. My target is for this stock to outperform the peer average by 5% or better.

In this peer group I selected, revenue appears to have been a struggle in the last year, with an average negative -13.2% revenue growth.

My focus stock, FedEx, outperformed the average by 6.7%, beating my target and earning a rating point in this category. The company in its quarterly earnings presentation mentioned “demand softness” as a contributor, and weakness in the air and freight segments.

As noted in the following graphic, lower volume is a major factor:

Revenue Growth (YoY)

Diving into this stock’s YoY revenue growth comparing the quarter ending in August with the same one a year prior, my target is to get a 5% YoY growth.

In this case, FedEx saw a revenue decline, as already mentioned, and it was -6.7% on a YoY basis, missing my target and losing a potential rating point here.

Further, its updated outlook for the rest of this fiscal year (currently FY24) is flat on revenue and not extremely positive right now.

Earnings Growth (YoY)

The net income situation looked much better for this company than did revenue. I was looking for a 5% YoY gain, and this company beat my target with a 23.2% YoY gain in earnings, and earning a rating point from me.

One key point to mention is that FedEx has implemented its FedEx Drive initiative as a cost-cutting measure across the organization, which I think will continue to improve profitability as its focus is to deliver cost savings, as the graphic below highlights:

To better understand FedEx Drive, the company describes it as an effort to move from the current structure of multiple individual operating companies (FedEx Express, FedEx Ground, etc.) to a concept of “One FedEx”, which hopes to be a “leaner, more agile company” which “reduces cost to serve and improves capital efficiency.”

Consider that the company has already used this concept to identify $4B in cost savings, with more on the way:

Being such a high-overhead company with high debt loads, but also one that seems to be trying to innovate and focus on continuous process improvement, I think that manageable cost control is something I keep an eye on as an analyst, because I know how much the market cares about bottom-line numbers and how the next quarter’s earnings can potentially impact a share price.

Cashflow Growth (YoY)

From its cash flow statement, I am looking for a 5% or better YoY improvement in free cash flow per share, and I got it, as this company achieved an amazing 200% YoY improvement in this metric.

One item that can impact cash flow is capital spending, and so I want to highlight that the company’s updated FY24 forecast shows the same outlook for spend in June as in September, without change.

Equity Growth (YoY)

In looking at the balance sheet, my target is a 5% or better YoY growth in positive equity. This stock achieved that with a 5.5% YoY growth in equity, earning a rating point from me here.

Important to note as to what I think are contributing factors is that both cash and total assets increased on a YoY basis. In fact, it is a cash strong company with $7B in cash and equivalents, up from $6.85B in August 2022. At the same time, both long-term debt and total liabilities saw somewhat of an uptick as well, so this too can impact equity/book value.

3 Year Dividend Growth

From its dividends data, I am interested in the 3 year growth and have set a target of 5% or better. When comparing the Sep 2023 quarterly dividend of $1.26 with that of $0.65 in Sep 2020, it achieves a 93.8% growth in this period being tracked, easily beating my target by a lot.

I would make the case that this stock should qualify for my “dividend quick picks” of the week because of such nice growth, particularly of interest to those of my readers who are dividend-oriented investors as I am, focusing on the quarterly cashflow potential here.

More good news is that this company has already committed around $1.3B in this fiscal year in the form of dividends, a sign of a focus on returning capital back to shareholders.

Dividend Yield vs Sector

In terms of comparing its dividend yield with its sector, I am also impressed there, as it exceeded my target of a 5% difference, actually beating the sector by 26.1%.

Although this stock does beat its peer Forward Air Corp (FWRD) who has a dividend yield of just 1.45%, it’s important to mention that another peer in this group, shipping rival UPS (UPS) has a forward yield of 4.53%. So, if I were only looking at this metric alone, and not all the other factors, I would clearly go with UPS instead.

Share Price vs Moving Average

Now, let’s briefly talk about this stock’s share price in relation to its 200-day simple moving average (“SMA”).

As of the writing of this note, the share price is hovering around $258.54 and continues to trade above the moving average, as it seems to have been doing most of the year, clearly showing market bullishness, despite a slight dip this fall.

Since I am looking for price dip opportunities of 5% or more below the moving average, this share price being nearly 9% above average would not be a great buy price in my opinion but also not a terrible one either. I think this fall’s mini price dip could have been an opportunity if one was able to snatch it at that price and hold.

In my portfolio strategy, I am focusing on benefitting from large price spreads between dips and rebounds, in relation to the 200-day SMA, so I like this stock at somewhere below $236 perhaps.

Since I do get a lot of comments with readers’ target buy price, I welcome your thoughts on where you think a buy range could be for this stock, and why, so we get a discussion going.

Price Return vs S&P500

In studying the market momentum of this stock, seems the market loves this stock more than I love the current share price.

In fact, its 1 year price return of 45% was actually over 231% higher than the return of the S&P500 index in that same period, so definitely impressed there.

If you compare its return to the S&P index, it has been able to outperform this well-tracked index for most of the year, which also correlates to the price chart I presented showing the share price trending above its moving average most of the year.

Its peer UPS, who we mentioned earlier, actually did not do as well in this category, with its momentum chart showing a negative -20.36% price return in that same period, underperforming the S&P.

I think FedEx should continue to outperform and attract market bulls due to its nice earnings growth, but it also beat earnings estimates 3 out of the last 4 quarters, so that too could have brought out the bulls.

P/E Ratio

Now, let’s talk about valuation metrics. For starters, the forward price to earnings (P/E) ratio at 14.90 shows a nice undervaluation in this metric. I was looking for it to be within 5% of the sector average, and it is almost 29% below the sector average, so I will call it an undervaluation opportunity to potentially take advantage of.

I think what is driving this undervaluation on price-to-earnings is the “earnings” side of that ratio. As I have mentioned earlier, earnings saw a 23% YoY rise in the most recent quarterly results. At the same time, the current share price is not higher than it was in August, if you look at my YChart again.

Since I am positive on future earnings results, as I have already discussed and why, I think this price-to-earnings scenario could continue to be reasonably valued unless a major price spike occurs. I am not sure that will happen, considering the share price is already trading at nearly 9% above the 200 day moving average.

P/B Ratio

As for the P/B ratio, it appears undervalued also, being nearly 7% below its industry average. I am targeting a valuation that is preferably below the average or near it, so I gave it a rating point here.

Readers should consider that this company’s positive equity recently went up nearly 6% on a YoY basis, which is why I track that metric because it tells a good story that could explain why this valuation is low. So, I think the “B” part of the ratio, or book value, is what is contributing to this undervaluation.

If you compare this valuation with that of its peer, UPS, who has a forward price to book value of 6.4x, I think the market is pricing FedEx a lot better in regards to the book value at just 2.3x book value, as well as better than its peer CH Robinson whose forward P/B ratio is a whopping 7.04.

However, since I am bullish on FedEx then naturally I expect its share price to go up somewhat and so that could bring that P/B ratio up a bit.

Return on Equity

In looking at return on equity for this stock, I am tracking the trailing twelve month “return on common equity,” as a leading gauge on how much common investors are receiving from their equity investment.

From the table I created, you can see that this stock’s “ROE” beats the sector average by over 30%, and since I am looking for an ROE beating the average this stock earns another rating point here from me.

However, again I should mention that rival / peer UPS crushed it on this metric with a 47.3% return on common equity, over 200% above the industry average. Just a thought if you are comparing the various peers in this sector.

I think this is driven by that earnings growth I already mentioned, and this metric matters because it tells a story of what kind of return are investors getting on their common stock investment.

It’s important to note that heavily indebted companies, like this one, may be relying on a lot of debt financing and this can cause the “ROE” to spike and appear to be a high return. FedEx, for instance, has long-term debt of $19.7B, which is 23% of total assets, according to its balance sheet. However, as mentioned earlier, with earnings improving and positive equity also improving lately, I am hoping this ratio will be less skewed going forward.

Risk Score

Let’s face it, this is a very capital-intensive operation with fleets of trucks, aircraft, logistics centers, personnel, and so on. Hence, it is not unusual that such a company takes on a lot of debt financing.

What I am looking for in terms of risk, however, are rising trends: rising long term debt along with rising long term interest expenses. One can impact the book value while the other can impact profit/loss each quarter. What may have been tolerable during low-interest environments of a few years ago now is more on my radar in a period of high cost of debt.

When it comes to FedEx, its long-term debt has gone up to $19.72B from $19.46B in the prior year, essentially less than a 2% rise in a year. At the same time, its quarterly interest expense stood at $91B in the recently reported quarter, actually down from $142B in the prior year’s quarter, declining 36%.

Based on the above evidence, I gave this stock a medium risk impact and probability, and so I will not be reducing the overall rating on this stock as I don’t think the debt risk is very high for this type of business.

WholeScore Rating

In today’s note, this stock got a WholeScore of 10, earning a “buy” rating from me.

In comparison to the consensus rating today on November 15th, I am agreeing with the buy consensus from SA analysts and Wall Street.

Summary and Forward Outlook

From today’s note, I am bullish on this stock due to their earnings growth, dividend growth, undervaluation, and outperformance of the S&P500, to name a few reasons.

Some offsetting negative factors include a share price trading at a premium to the moving average, and lackluster YoY revenue growth.

The risk of its debt load was discussed, and determined to be only moderate risk as it is offset by declining interest expenses.

FedEx is one of those legacy American companies helping make logistics possible and getting the shipments of consumers and businesses to where they need to go. Hence, I would consider this company part of the critical transportation infrastructure, in my opinion of course.

My forward outlook remains modestly positive on this stock, particularly since we are approaching one of its busiest quarters as the holiday shopping season is just around the corner, and earlier talk of potential recessions seems to have dampened for now.