FedEx (FDX) Last Update 9/26/21
Related: LUV DAL UAL UNP
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
FedEx
STOCK PRICE
DIVISION
% of STOCK PRICE
FedEx Ground
55.1%
$248
FedEx Express
32.9%
$148
FedEx Freight
12.0%
$54
Net Debt
27.6% $124
TOTAL
100%
$450
$325.65
Yours
Trefis Price
N/A
$229
Market
 
Top Drivers for Period
Key Drivers
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TREFIS Analysis


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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

FedEx Company

VALUATION HIGHLIGHTS

  1. FedEx Ground constitutes 55% of the Trefis price estimate for FedEx's stock.
  2. FedEx Express constitute 33% of the Trefis price estimate for FedEx's stock.
  3. FedEx Freight constitutes 12% of the Trefis price estimate for FedEx's stock.

WHAT HAS CHANGED?

  1. Impact of Coronavirus On FedEx's Stock

The logistics sector has not been immune to the current coronavirus crisis, although logistics majors have fared far better than the broader markets. FedEx stock has significantly outperformed the broader markets with over a 2x move from its bottom made in March 2020, largely in-line with the broader S&P500 (through Sep 22, 2021). While the move in broader markets was led by the Fed stimulus and the market has able to “look through” the weak period and take a longer-term view, with investors mainly focusing their attention on 2021 results. FedEx, in particular, saw an increase in demand for ground shipments, as more people used digital channels to shop rather than venturing out in the current pandemic. This has aided its earnings and. in turn, the stock price growth.

However, things weren't that good in Q1 fiscal 2022. The company reported earnings below the street estimates resulting in a 9% fall in the stock in a single trading session on Sep 22. This can be attributed to a constrained labor market, resulting in higher wages to be paid by FedEx. The company expects the headwinds to continue in the near term, and lowered its full-fiscal year outlook.

  1. Q1 Fiscal 2022 Performance
The company reported a 14% top line growth to $22.0 billion in Q1 fiscal 2022, led by gains in all three - Express, Ground and Freight - segments. However, the company's operating margins declined to 6.4% in Q1, compared to 8.2% in the prior-year quarter. This can be attributed to increased labor costs due to limited labor availability and also a rise in fuel costs. This impacted the company's bottom-line, which stood at $4.37 per share in Q1, compared to $4.87 in the prior year quarter. The company also lowered its full-fiscal 2022 earnings outlook to now be in the range of $19.75 to $21.00, compared to its prior guidance of $20.50 to $21.50.

  1. Global Slowdown And Trade Wars

FedEx, a global delivery and logistics company, did face some headwinds in fiscal 2020 from an economic slowdown, and a potentially escalating trade-war between China and the U.S. This also impacted the stock performance in 2019.

However, early 2020 turned out to be even more concerning given the spread of Covid-19 and it resulted in FDX stock price decline of over 45% from its Feb 2020 highs of over $160 to lows seen of $90 in Mar 2020.

Post March, the stock has seen stellar growth led by better than expected results amid an increase in FedEx's ground shipments owing to the pandemic.

However, in fiscal Q1 2022, the company faced headwinds from rising labor costs, impacting its overall margins. Also, with a rise in vaccination rate, the overall ground shipment volume may see slower growth going forward. These factors weighed on its stock price, which fell from levels of around $315 in May this year to under $230 currently (Sep 22, 2021).

  1. High Costs Affect Profitability

Apart from trade war and pandemic worries, high costs are hurting the company’s bottom-line growth. With FedEx investing substantially in facilities’ upgrade at its key divisions, capital expenses are on the rise. Such steep costs might hit FedEx’s bottom line in the near term. Notably, capital outlay was $5.9 billion in fiscal 2020. Additionally, integration expenses pertaining to TNT Express are pushing up costs.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of FedEx that present opportunities for upside or downside to the current Trefis price estimate.

FedEx EBITDA Margin

  • FedEx EBITDA Margin: FedEx EBITDA Margins declined from around 20% levels in fiscal 2014 to 14% in fiscal 2020, partly due to lower fuel surcharges and unfavorable exchange rates. Higher labor costs are also affecting operating profits. That said, if fuel costs were to decline in the near term, it could have a positive impact on margins. If FedEx margins increase to north of 21% (as compared to our current estimate of 19%) over our forecast period, this would lead to a >25% upside in our valuation.

BUSINESS SUMMARY

FedEx Corp. (NYSE:FDX) is a holding company with subsidiaries that provide a broad range of transportation, e-commerce, and business services, under the FedEx brand.

Its primary operating companies are Federal Express Corporation (“FedEx Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading provider of small package ground delivery services; and the FedEx Freight LTL Group, which comprises the FedEx Freight and FedEx National LTL businesses of FedEx Freight Corporation.

These companies represent its major service lines and, along with FedEx Corporate Services, Inc. (“FedEx Services”), form the core of our reportable segments. The FedEx Services segment provides sales, marketing, information technology, and customer service support to its transportation segments. In addition, the FedEx Services segment provides customers with retail access to FedEx Express and FedEx Ground shipping services through FedEx Office and Print Services, Inc. (“FedEx Office”).

SOURCES OF VALUE

The Express Package and the Ground Package divisions account for approximately 52% and 32% of FedEx revenue, respectively. Both, the Ground Package Division and The Express Package Division, are valuable to FedEx for the following reasons:

Highest Average Daily Package Volume for the Ground Division

The Ground Package Division, is the second largest division of FedEx in terms of volume and accounts for close to 60% of the company's valuation. In FY 2020, the division recorded average daily package volume (ADV) of 10 million, 12% higher than what it recorded in FY 2019.

Accelerating economic growth in the U.S. drove volume growth for the division, particularly its B2C business. With the acquisition of GENCO (third- party logistics provider) in January 2015, we believe that the Ground Package Division will continue to show growth and be a valuable division for FedEx. Especially as U.S. domestic e-commerce increases.

Highest composite package yields for the Express Package division

Express Deliveries are FedEx's core strength and boasts very high composite package yields as compared to FedEx Freight or the FedEx Ground division. FedEx Express Package's composite package yield is much higher than that for FedEx Freight and FedEx Ground.

The primary reason behind the increased yields in Express Package is the growing eCommerce industry. With robust growth in B2C eCommerce sales expected going forward, we believe FedEx's Express Package division will continue to grow.

KEY TRENDS

Lower GDP growth

Demand for shipping volume is closely correlated with the overall consumer demand and GDP growth of an economy. Global growth is currently projected at -4.9% in 2020. The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual rather than a V-shape. In 2021 global growth is projected at 5.4%, much lower than the pre-COVID-19 projections of January 2020.

(Link)

The global economy is showing signs of slowdown, including the emerging markets, primarily due to the impact of Covid-19 pandemic. China is impacted with the trade war, and the economy is seeing slower growth.

Growing U.S. e-commerce industry

The growing e-commerce industry has been driving volumes at FedEx's U.S. Domestic Package segment. In the wake of Covid-19, more people are opting for e-commerce channels to meet their needs. (Link)

Not only is online shopping more convenient, but it has also become more accessible due to the increasing smartphone and tablet penetration, supported with higher internet penetration. Many brick-and-mortar retailers have rolled out online shopping portals to cater to the growing online retail shopping customer base. Deals and discounts on online shopping also encourage customers to purchase via websites rather than traditional stores.

FedEx’s package volume is directly impacted by e-commerce sales, since many online retailers employ FedEx’ services in order to offer their customers timely and economical delivery of products. With the North American e-commerce market estimated to grow at a steady rate going forward, we believe FedEx will see increasing volumes in the coming years.

Dimension based pricing

In the past (prior to 2014), FedEx's margins declined due to the growing number of light-weight yet voluminous packages. Since these packages were priced on the basis of their weight, they generated lower revenues due to lesser packages carried per vehicle or aircraft. In order to realize better prices from such packages, FedEx has decided to follow a dimension based pricing strategy which will result in a 30-50% increase in pricing of the light-weight yet bulky packages. This strategy, which became effective from December 29, 2014, can further help improve margins.

Demand for cheaper shipping options and higher competition from sea-borne shipping

There has been a clear trend of customers shifting from premium services to slower or deferred products while seeking lower shipping expenses. The air freight carriers are accordingly facing higher market share competition with seaborne shipping options that offers lower rates.