Almost every company in America has been complaining about inflationary pressures, particularly supply chain and shipping costs. But what if a company is part of the supply chain?
FedEx Corporation (FDX, Financial) is one such company. It provides transportation, e-commerce and business services on a global basis. The FedEx Express segment offers express transportation, small-package ground delivery, freight transportation services, time-critical transportation services and cross-border e-commerce related solutions. The FedEx Ground segment provides day-certain delivery services to businesses and residences across North America. The company’s FedEx Freight segment offers so-called less-than-truckload freight transportation services. Fedex operates the world's largest cargo only air fleet and has more than 30,000 vehicles in its global operations.
The company was founded in 1971 by Fred Smith and has grown to $84 billion in revenues and a $56 billion market capitalization. However, the stock has recently been coming off of its highs. It now looks undervalued in my view; I believe investors are underestimating the long-term prospects.
Financial review
In March, FedEx reported fiscal third-quarter results for the period ending Feb. 28. Revenues increased 10% compared to the prior year period, adjusted net income increased 30% and adjusted EPS increased 32%.
On a segment basis, FedEx Express operating results increased, with revenues jumping 5.0% and operating income up 12%, driven by higher yields, a net fuel benefit and lower variable compensation expense. The improved results were somewhat offset by the negative effects of a Covid resurgence during the quarter, which affected short-term economic growth, labor availability and shipping demand.
FedEx Ground revenues increased 10% but operating income declined 9.0%, primarily due to increased rates for purchased transportation and employee wages, network inefficiencies and expansion-related costs.
FedEx Freight revenues increased 23% and operating income nearly tripled, which was driven by a continued focus on revenue quality and profitable growth according to the company. Revenue per shipment increased 19% and average daily shipments grew 2% during the quarter, while the operating margin increased 850 basis points to 15.0%.
The company commented:
“We successfully executed during the holiday peak season, resulting in record December operating income,” said Michael C. Lenz, FedEx Corp. executive vice president and chief financial officer. “Our strong quarterly operating income increase was dampened by the surge of the Omicron variant which caused disruptions to our networks and diminished customer demand in January and into February. We remain focused on revenue quality and operational efficiency initiatives to mitigate inflationary pressures and drive earnings improvement.”
Valuation
The company gave slightly complex guidance for 2022 due to the inability to forecast the mark-to-market value of its retirement plans, mostly due to the recent fluctuations in interest rates.
Before adjustments and unusual items, FedEx expects to earn between $20.50 and $21.50 per share for the fiscal year ending May 2022. Analyst EPS estimates are largely in line with these numbers, coming in around $20.60 per share. That puts FedEx very close to joining the single-digit forward price-earnings ratio club that has proliferated in recent months, and if one considers 2023 estimated earnings, then the valuation looks even lower. The company sells at a forward enterprise-value-to-Ebitda ratio of approximately 8.
Using the GuruFocus DCF calculator, a got a fair value estimate of about $300 per share based on starting EPS of $20.50 and a 5.0% long-term growth rate. The company’s current dividend yield is roughly in line with market average at 1.37%.
Guru trades
Gurus who have purchased or added to their positions in FedEx stock recently include Charles Brandes (Trades, Portfolio) and Tom Gayner (Trades, Portfolio). Gurus who have reduced or sold out of their positions include First Pacific Advisors (Trades, Portfolio) and Jim Simons (Trades, Portfolio).
Conclusion
Fedex appears to be undervalued at this time for investors with a long-term time horizon, in my opinion. I believe people are overestimating the high fuel costs and inflationary pressures. The big question for the fiscal fourth quarter and full-year results is, can the company overcome the historic levels of these fuel cost increase? Most of FedEx's customers can be charged a fuel surcharge to adjust for those problems, but whether it's actually accepted without a major downturn in volumes has yet to be seen. Nonetheless, FedEx has the global infrastructure that should provide a competitive advantage over time.
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