FedEx Corp. (FDX, Financial) is dazzling Wall Street with its impressive earnings beat, but it is the stock’s defensive advantages that are getting less attention as bull fever has investors focusing on top and bottom-line growth. FedEx is not only a star in this current bull market, but can also be seen as a shrewd defensive play in preparation for an eventual correction or even a bear market or recession, come what may.
Not that FedEx shares are immune to a downturn. They are not. But a case can be made that in the event of a downturn, FedEx stock could end up declining less than others for two reasons. First, the shipping company’s conservative finances and low debt burden protect it from any sustained rise in interest rates. Second, the company is positioned to continue benefiting in a world where traditional brick-and-mortar retail keeps shrinking by the day.
Regarding FedEx’s balance sheet, it is quite formidable. FedEx carries just over $15 billion in debt, which considered against its market cap of $65 billion, puts it a low 23% leverage. What about interest on that debt? Debt service costs have broken through the half a billion dollar mark annually, but that is nothing FedEx cannot handle, especially with over $12 billion in cash and liquid assets.
The main plus with FedEx’s low debt, though, is not its absolute level, but the fact it is all but immune to any sustained rise in interest rates. The vast majority of its borrowings are fixed rate. Second, it has no significant principle payments to make until after 2022, aside from a $1.3 billion principle payment due in 2019 that it is amply prepared to either pay or roll over, whichever proves the better option come the time.
Second, the decline in brick-and-mortar retail revenues translates directly into an improved top line for FedEx. Obviously, if people are not showing up at traditional retailers, they are having their items shipped. The trend favoring online retail over traditional brick and mortar is not going to reverse anytime soon. And, as big-box retailers develop their own online marketplaces to remain competitive, FedEx benefits all the more.
President Trump’s tax reform legislation that just passed will also benefit the company enormously by lowering FedEx’s corporate tax bill from about 35% to just 21%. Had that cut applied for 2017, it would have slashed FedEx’s tax bill by about $620 million. Assuming the reforms apply for at least the next three years, that is an accumulated benefit of nearly $2 billion to its bottom line through the end of this decade.
In the event of a recession, bear market or both, FedEx will have its troubles just as it did in 2008. But there will not be any structural and certainly no existential problems as there may be for other companies that are highly levered and exposed to interest rate increases.
So not only is FedEx a good growth stock in a bull market environment, but it is also a good defensive pick in times of market stress.
Disclosure: Long FDX.
