What’s Next For FedEx Stock After A Large 2.5x Rally Over The Last Year?

by Trefis Team
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[Updated: 5/26/2021] FedEx Rates Update

FedEx (NYSE: FDX) recently announced a revision in surcharges for certain express and ground shipments. The logistics company periodically revises its rates and surcharges in order to keep up with any changes in operating costs. As per the latest update, FedEx has revised its peak additional handling surcharge for express and ground services within the U.S., and international ground service, to $3.75 per package from $3.00 per package currently, reflecting a 25% growth. Similarly, a peak surcharge for ground economy package will be increased by 33% to $1.00 per package. Lastly, the peak residential delivery charge for express and ground services in the U.S. will double to $0.60 per package, compared to $0.30 currently. All these changes will come into effect from June 21, 2021.

While FedEx has seen a massive growth in ground shipments in the current pandemic driven by a rise in demand for e-commerce, the company has also seen increased operating costs, and it makes sense to pass-on the increase to customers, in order to retain or expand its margins. While the company has benefited from volume growth over the recent quarters, it will likely see growth in its margins going forward, driven by better pricing.

Looking at the company’s performance for the nine month period ending Feb, 2021, total revenue increased 18% to $16.4 billion, primarily led by a large 37% growth in ground shipments revenue, a trend expected to continue in the near term. The company’s adjusted net margins also improved to 5.7% vs. 3.5% for the prior year period. Higher revenues and margin expansion meant that FedEx’s EPS almost doubled to $13.17 for the nine-month period ending Feb, 2021, compared to $6.97 in the prior year period.

This strong performance was rewarded by the investors, and FDX stock has also seen a large 2.5x rise over the last one year, compared to just a 40% move for the S&P500. But now that FDX stock has seen such a large move, will it resume its upwards trajectory over the coming weeks, or is a decline in the stock imminent? Going by our FedEx Valuation of $342 per share, based on expected adjusted EPS of $18.01 for fiscal 2021 (fiscal ends in June) and a P/E multiple of 19x, we believe that there is still some room left for growth.

[Updated: 3/16/2021] FDX Fiscal Q3 Earnings Preview

FedEx (NYSE: FDX) is scheduled to report its fiscal Q3 2021 results on Thursday, March 18. We expect FedEx to likely post revenue in-line, and earnings below the street expectations. The overall rebound in the economies across the globe likely aided the shipment revenues for its Express as well as Ground segments.

However, our forecast indicates that FedEx’s valuation is around $320 per share, which is roughly 20% above the current market price of around $267. Even if FedEx were to report below consensus earnings, the stock looks attractive at the current valuations.  Our interactive dashboard analysis on FedEx’s Pre-Earnings has additional details.

(1) Revenues expected to be in-line with the consensus estimates

Trefis estimates FedEx’s Q3 2020 revenues to be around $19.9 Bil, in-line with the consensus estimate. FedEx over the recent quarters has seen an increase in demand for shipments, primarily led by a surge in e-commerce orders, as people preferred to stay in-doors, during the pandemic. While this primarily aided the company’s Ground segment revenues, now with the gradual opening up of economies and vaccination drives, the company will likely see a pickup in demand for its other segments, as well. Looking back at fiscal Q2 2021, revenues grew a solid 19% to $20.6 Bil, with Ground segment seeing a sharp 38% y-o-y jump in revenues. We expect strong demand for the Ground segment to continue in the near term. Our dashboard on FedEx’s Revenues offers more details on the company’s segments.

2) EPS likely to be below the consensus estimates

FedEx’s fiscal Q3 2021 earnings per share (EPS) is expected to be $3.10 per Trefis analysis, 8% below the consensus estimate of $3.36. FedEx’s net income of $1.3 Bil in fiscal Q2 2021 reflected a large 2x rise from its $660 million figure in the prior-year quarter. This can be attributed to higher revenues and margin expansion, partly due to lower fuel costs. However, margins could be impacted in the near term due to integration of smart post package volume into the Ground business.

(3) Stock price estimate 20% above than the current market price

Going by our FedEx’s Valuation, with an EPS estimate of around $17.17 and a P/E multiple of around 19x in 2021, this translates into a price of $320, which is 20% above the current market price of around $267. While the 19x figure for FedEx is higher than the levels of 16x seen in 2018, it compares favorably with 21x P/E for its peer UPS.

Although the company could face some pressure on its margins in the near term, we believe the demand for the residential Ground shipments will continue to drive the overall revenue growth, along with the higher demand for Express segment, driven by the resumption of economic activities and increased demand for shipments.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Earnings for the full year

While FDX stock may see a rise in the near term, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for United Parcel Service vs. Sprouts Farmers Market.

See all Trefis Price Estimates and Download Trefis Data here

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