Is FedEx A Buy At $125?

FedEx (NYSE:FDX) stock has lost 15% of it value thus far in 2020 (through April 27), and it could slide more in the near term, given the trends in the broader economy, with the high unemployment rate, and uncertainties around the timeline of the current crisis. Moreover, FedEx’s stock was actually down 38% between early 2018 and 2020, as compared to over 20% growth for the S&P 500. Our dashboard, ‘What Factors Drove -47% Change In FedEx Corporation’s Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

FedEx’s stock price decline of 47% between 2017-19 can be attributed to its mediocre performance, with revenues and earnings, primarily in fiscal 2019. The company’s revenues grew 15% from 2017 to 2019, while the adjusted net income margin declined 30 bps from 6.2% in 2017 to 5.9% in 2019. There was a modest decline in number of shares outstanding over the same period, led by around $3 billion spent on share repurchases. Higher revenues, a modest margin expansion, and slightly lower share count resulted in 12.3% adjusted EPS growth.

Given the lackluster performance, FedEx’s P/E multiple declined from 17.4x in 2017 to 9.7x in 2019. FedEx’s P/E is further down to about 8.2x now, and given the volatility of the current situation, along with the challenges faced by the company (discussed in below section), there is additional possible downside for the company’s multiple, when compared to levels seen in the past years – P/E of 17.4 at end of 2017, and 8.2x currently.

How Is Coronavirus Impacting FedEx’s Stock?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity, and people are confined to their homes. FedEx’s business is largely linked to the health of the economy, which is isn’t great for now. The U.S. unemployment rate is expected to surge to 16% this month, as compared to a 50-year low of 3.5% seen before the pandemic. It is expected to average above 10% next year as well. The U.S. GDP is expected to be negative 6% in Q1 2020, and negative 30% in Q2 2020. This situation won’t be good for delivery companies, including FedEx.

Beyond the impact of the weak economy, FedEx is still struggling with integration of TNT Express, which it acquired in 2016. FedEx Express segment, which includes the TNT express business, saw its operating margin decline from 7% in fiscal 2017 to 5.7% in fiscal 2019. Even with three quarters out in fiscal 2020, FedEx spent another $207 million on TNT integration. The company has spent over $1.3 billion in this integration process between fiscal 2017 and now. Lastly, the company’s contract with Amazon for domestic U.S. delivery ended in August 2019, and it was not renewed. While Amazon was not a high-margin business for FedEx, the loss of business, among other factors, has impacted the company’s performance. FedEx reported 3% growth in Q3 fiscal 2020 revenues, primarily driven by FedEx Ground segment. However, higher operating expenses resulted in a 280 bps decline in operating income. Adjusted EPS plunged 53% to $1.53 in Q3 fiscal 2020.

Between January 31st and April 27th, FedEx stock has lost 12% of its value, a decline largely in line with the broader S&P 500. A bulk of the decline in the stock markets came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia. Currently there are uncertainties pertaining to the current crisis, with no cure or vaccine visible in the near term, and it is difficult to predict the economic repercussions over the next few quarters. As such, FedEx stock could potentially see more downside from these levels.

While FedEx can fall further from current levels, in terms of valuation, FedEx appears to be cheaper than UPS.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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