VALUATION HIGHLIGHTS

1. FedEx Ground constitutes 53% of the Trefis price estimate for FedEx's stock.
2. FedEx Express constitute 37% of the Trefis price estimate for FedEx's stock.
3. FedEx Freight constitutes 10% of the Trefis price estimate for FedEx's stock.

WHAT HAS CHANGED?

1. FDX Stock Performance

FDX stock has seen little change, moving slightly from levels of $260 in early January 2021 to around $265 now (March 21, 2024), vs. an increase of about 40% for the S&P 500 over this roughly 3-year period.

Overall, the performance of FDX stock with respect to the index has been lackluster. Returns for the stock were 0% in 2021, -33% in 2022, and 46% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that FDX underperformed the S&P in 2021 and 2022.

2. Q3 Fiscal 2024 Performance

FedEx reported mixed results for Q3 2024. The company saw its revenue fall 2% y-o-y to $21.7 billion. This was below the consensus estimate of $22.0 billion. This can be attributed to a decline in average daily package volume for the Express segment.

The company saw a 90 bps y-o-y rise in operating margin to 6.2% on an adjusted basis. The company reported earnings of $3.86 per share, reflecting a 13% y-o-y rise. The bottom line was well above the consensus estimate of $3.46.

3. Impact of Coronavirus On FedEx's Stock

FedEx stock saw over a 3x rise from its bottom of around $90 in March 2020 to $310 through May 2021 before falling to nearly $265 now (as of late March 2024).

FedEx, in particular, saw an increase in demand for ground shipments as more people used digital channels for shopping rather than venturing out during the pandemic. This has aided its earnings and, in turn, the stock price growth. However, this trend has now reversed with a decline in package volume.

4. 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 dropping over 45% from its Feb 2020 highs of over $160 to lows seen of $90 in March 2020.

Post-March 2020, 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, of late, the company is facing headwinds from rising costs, impacting its overall margins. Also, the shipment volumes are now seeing a decline. These factors weighed on its stock price, which fell from around $310 in May 2021 to around $250 now (mid-September 2023).

5. High Costs Affect Profitability

Besides the trade war and pandemic worries, high costs are hurting the company's bottom-line growth. With FedEx investing substantially in facility upgrades at its key divisions, capital expenses are rising. Such steep costs might hit FedEx's bottom line in the near term. Notably, the capital outlay was $6.2 billion in fiscal 2023, and the company expects it to be $5.9 billion in fiscal 2024.

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 2018 to 15% in fiscal 2023, 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 positively impact margins. If FedEx margins increase to the north of 23% (as compared to our current estimate of a little under 20%) over our forecast period, this will lead to a >20% 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 38% 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 2023, the division recorded an average daily package volume (ADV) of over 9 million.

Accelerating economic growth in the U.S. drove volume growth for the division, particularly its B2C business. E-commerce growth in the wake of the pandemic also aided this growth. That said, the volume was lower than that in fiscal 2021, reflecting the impact of the opening up of the economies as well as a slowdown in overall economic growth.

Highest composite package yields for the Express Package division

Express Deliveries are FedEx's core strength and boast very high composite package yields 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 growing eCommerce industry is the primary reason behind the increased yields in Express Package. With robust growth in B2C eCommerce sales, we believe FedEx's Express Package division will continue to grow.

KEY TRENDS

GDP growth

Global GDP growth saw a rebound gradually after the Covid-19 impact, with global GDP declining over 4% in 2020. It rose nearly 6% in 2021, and it saw another 3% growth in 2022. Rising global GDP growth will drive steady growth in shipments and, in turn, revenues for FedEx going forward.

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 shifted to 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 by 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.

E-commerce sales directly impact FedEx's package volume since many online retailers employ FedEx's services to offer their customers timely and economical delivery of products. With the North American e-commerce market estimated to grow steadily going forward, we believe FedEx will see increasing volumes in the coming years.

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.