FedEx A Better Transportation Bet Over CSX?

by Trefis Team
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FedEx (NYSE:FDX), one of the world’s largest parcel delivery companies, has seen its stock price fall roughly 45% in the last few years. In comparison, CSX Corporation (NYSE:CSX), a U.S. based railroad company, has seen its stock grow by over 30% during the same period. This comes despite the fact that FedEx’s revenue growth was 3.5x higher at 16%, compared to 5% for CSX. Though CSX’s margin expansion was much higher at 52% vs -5% for FedEx between 2017 and 2019, and this likely explains the stock’s previous growth. That said, looking ahead we believe FedEx is a better bet in the transportation sector at the moment, compared to CSX. Our dashboard, ‘FedEx vs. CSX: Does The Stock Price Movement Make Sense?‘, has the underlying numbers.

Fundamentals For Both Companies Are Strong, But FedEx’s Valuation And Outlook Is Attractive

Let’s look at the core business prospects of both companies a little more closely. FedEx, which delivered 3.0 billion packages in 2019 compared to 4.7 billion for UPS and 2.5 billion for Amazon, is clearly a big player in package delivery. The company has seen 4.4% volume growth and 5.4% ARPU growth, resulting in a 10% revenue growth for its largest segment (57% of total revenue), Express, between 2017 and 2019. Despite steady growth, the company’s valuation has dropped over the last few years. This can be attributed to the concerns over integration with TNT. FedEx company acquired TNT in 2016, but its integration has been challenging, and it is still under process, resulting in contraction of its net margins. The company has spent over $1.3 billion in this integration process since 2017. However, FedEx itself has been busy investing in its Ground delivery facilities to reduce delivery time and costs, and it appears to be in a good position to improve its margins. Also, the recent pandemic has shifted demand for online sales even higher, which will bolster FedEx’s e-commerce business.

CSX is the leading railroad in the Eastern U.S., engaged primarily in freight transportation in the Southeast, East, and Midwest regions of the U.S. CSX also transports overseas freight through Atlantic and Gulf Coast ports in addition to providing freight to the Western U.S. through interchange with other railroads. While CSX has seen steady growth for most of its segments over the recent years, the coal freight has been a drag with shipments on a decline. This is a trend seen across the railroad companies with lower natural gas prices pushing the demand for coal lower, and the production in the U.S. also falling to multi-year lows. This trend is expected to continue in the near term, and with oil prices falling to multi-year lows, the demand for oil related shipments, including chemicals and frac sand, is expected to be lower in the near term.

But then what’s driving the stock price growth for CSX? There could be a couple of factors impacting CSX’s valuation, versus FedEx. CSX’s 2019 net margins of 28% were 5x that of the 6% for FedEx. Note that FedEx’s business has traditionally been a low-margin business. The important metric to look at is the margin expansion. CSX’s margin expanded a stellar 950 bps from 18.4% in 2017 to 27.9% in 2019, compared to a 30 bps contraction from 6.2% to 5.9% for FedEx over the same period.

While this explains the outperformance of CSX over FedEx, we still believe FedEx’s valuation currently looks quite attractive compared to CSX. FedEx trades at just 9x its 2019 adjusted EPS of $15.57, compared to 21x for CSX’s EPS of $3.33. FedEx’s P/E Multiple has declined roughly 50% from 17x at the end of 2017 to 9x currently, vs. a 10% drop for CSX’s P/E Multiple from 23x to 21x over the same period.

Looking for more transportation insights? See – ‘What Factors Drove 38% Change In Norfolk Southern Stock Between 2017 And Now?‘ and Why CSX Stock Is Up 2x While Revenues Grew A Mere 7%?

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