FedEx Stock May Rise In The Coming Quarters
FedEx (NYSE:FDX) has done well in the recent quarter with both earnings and revenues coming in higher. The company has been able to increase margins, and this especially has been supportive of the company’s earnings. The stock currently trades at a 13 P/E on current year earnings, and a Price to Book of 3.0. The wider industry of Shipping and Logistics has a P/E of 14.5. The shipment industry tends to be cyclical, therefore the current downtrend in the price of shipping stocks is reflective of the wider economy. Furthermore, the stock has traded down in the past six months with market expectations being higher than what actually came out in subsequent earnings.
We currently have a price estimate of $265 per share, which is 15% higher than the market price. You can use our interactive dashboard Is There Value In FedEx to modify key drivers and visualize the impact on FedEx’s price estimate.
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The recently imposed tariffs on China have had an effect on revenues. With the company losing almost 10% of revenue from China as a result. If a trade war continues, expect there to be further losses.
One of FedEx’s key customers, Amazon, has been building up its own shipment and logistics network. Accounting for almost 3% of Amazon’s revenue, FedEx stands to lose most of this source of revenue should Amazon decide to switch to its own shipping service instead of using FedEx. Additionally, the company is looking at losing customers to Amazon as prices continue to rise for its shipping and delivery segments. FedEx, out of its competitors, is already one of the most expensive. With Amazon coming in with lower prices there remains a potential threat going forward.
FedEx also has one of the oldest fleets in the airline and shipping industry, with the fleet averaging 22 years of age. With the company already carrying large amounts of debt on its balance sheet , any further increase in debt will only further negatively affect cash flow. Free cash flow has been a concern for FedEx in recent times. With the past two years showing negative free cash flow.
Should FedEx stabilize its revenue, improve its international presence, and be able to pass on the expected price increases in 2019 to customers, we believe there is value in the stock. We estimate it may rise from current levels. Cash flow remains a concern, and FedEx will need to get back to positive free cash flow to see its stock get back in line with the greater industry valuations. With the U.S economy being in a late stage cycle, cyclical risks remain as FedEx goes forward. Should cash flow become positive, and if the economy continues to grow, FedEx may see 10-20% upside going forward.
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