We think that FedEx stock (NYSE: FDX) currently is a better pick compared to C.H. Robinson Worldwide stock (NASDAQ: CHRW), a third party logistics provider, despite FDX’s higher valuation. FedEx trades at about 0.8x trailing revenues, compared to 0.6x for C.H. Robinson. Although both the companies saw a rise in revenue over the last year or so, as more people ordered goods online, and trucking demand also remained high, FDX stock has been weighed down over the recent months owing to rising labor costs impacting its earnings growth. For perspective, FDX stock is down 19% over the last six months, compared to a 6% fall for CHRW stock, both underperforming the broader indices, with the S&P500 rising 12% over the same period. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard FedEx vs C.H. Robinson Worldwide: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. FedEx’s Revenue Growth Has Been Stronger
Now, although C.H. Robinson’s revenue grew at a faster pace of 37% compared to 21% for FedEx during the last twelve month period, the latter has performed better over the last three years, with FedEx’s revenue rising at a CAGR of 9% vs. just 3% for C.H. Robinson. FedEx’s revenue rose 21% in fiscal 2021, and, looking forward, it is expected to rise 8% in fiscal 2022 to $91 billion, while C.H. Robinson’s revenue is expected to rise 40% to $23 billion in 2021 but remain flat y-o-y in 2022.
For FedEx, revenue growth over the recent quarters was triggered by shelter-in-place restrictions, resulting in more online orders. However, looking forward, with the rise in vaccination rate, the residential volume of ground deliveries is likely to see a slowdown, as people start to venture out of their homes. The international deliveries business has seen strong growth over the recent quarters, a trend expected to continue in the near term, with passenger travel still below the 2019 levels. Our FedEx Revenues dashboard provides more insight on the company’s revenues.
For C.H. Robinson, its Global Forwarding segment, which includes ocean freight services, air freight services, and customs brokerage, has seen a stellar 121% y-o-y growth for the nine-months period ending Sep 30, 2021. Also, the surface transportation business is seeing strong growth with resumption of industrial activities and easing of travel restrictions. Now, with holiday season approaching, the trucking industry will benefit from rising demand, bolstering C.H. Robinson’s revenue growth in the near term.
2. FedEx Has Seen Better Margin Growth
Looking at profitability, FedEx’s operating margin of 7.6% over the last twelve month period is better than just 4.5% for C.H. Robinson. That said, if we were to look at last three year average operating margin, FedEx’s 4.6% figure is in-line with 4.7% for C.H. Robinson. FedEx’s operating margin of 7.6% over the last twelve month period compares with 1.7% in 2019, before the pandemic. The current operating margin of 4.5% for C.H. Robinson is lower compared to FedEx, and it compares with its 4.8% figure in 2019.
We expect margins for both companies to face some headwinds in the near term, given the inflationary pressure and limited labor availability resulting in higher wages. For C.H Robinson, driver shortage is likely to remain an issue even in the next year. While fuel prices have also increased over 2x over the last year or so, this cost is partly offset by fuel surcharges levied to the customers. A few years back FedEx margins were adversely impacted due to high integration costs for the TNT acquisition, but most of those costs are now behind the company and FedEx is likely to see margin expansion in the long run.
The Net of It All
Now that over half of the U.S. population is fully vaccinated against Covid-19, with overall economic activity picking up, the demand for ground deliveries is likely to slow going forward (compared to the surge seen over the last year or so), impacting the revenue growth for FedEx. However, with economic growth the demand for trucking is likely to remain high in the near term. The demand for express shipping and freight business is also likely to rise.
C.H. Robinson’s current valuation is seemingly more attractive than that of FedEx, with CHRW stock trading at about 0.6x trailing revenues, versus 0.8x for FDX stock. However, FedEx has demonstrated better revenue growth and margin expansion in the recent past. Even if we were to look at financial risk, while FedEx’s 31% debt as a percentage of its equity is higher than 14% for C.H. Robinson, FedEx’s 8% cash as percentage of assets is much higher than the 3% figure for C.H. Robinson, implying that C.H. Robinson has a better debt position, while FedEx has a better cash cushion. This means that FDX stock does not appear to be at a higher risk compared to CHRW stock.
Overall, with better revenue and margin growth for FedEx, we think this gap in valuation between FedEx and C.H. Robinson is justified and FDX may outperform CHRW stock, going forward. In fact, going by our FedEx Valuation of $326 per share, there is an upside potential of over 36% from the current levels of around $243. On the other hand, the $103 price estimate per average of analyst forecasts indicates only 11% upside for CHRW stock.
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