We think FedEx stock (NYSE: FDX) is currently a better pick than XPO Logistics stock (NYSE: XPO), a logistics and transportation company, despite FedEx’s comparatively higher valuation. FedEx trades at about 0.7x trailing revenues, compared to 0.3x for XPO. We believe that this gap in the valuation of the two companies is justified, given FedEx’s better revenue growth and profitability, along with its better growth prospects. Although both the companies saw a rise in revenue over the recent years, FedEx’s growth has been better, aided by e-commerce growth.
Looking at stock returns, FDX, with -19% returns over the last six months, has outperformed XPO, which saw a -27% change. Both the stocks have underperformed the broader indices, with the S&P500 falling around 2% over the same period. FDX stock, in particular, has been weighed down due to its margin contraction on the back of inflationary headwinds, primarily impacting the labor costs.
However, there is more to the comparison, and we believe that FedEx stands out with higher expected returns than XPO, as discussed in the sections below. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis – FedEx vs. XPO Logistics: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
While FDX stock looks poised for better gains in the future, it is helpful to see how its peers stack up. Check out how FedEx’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
1. FedEx’s Revenue Growth Has Been Stronger
- Both companies managed to see sales growth over the recent years, but FedEx has witnessed a comparatively faster revenue growth. FedEx’s sales have jumped from $65.5 billion in 2018 to $89.6 billion over the last twelve months, while XPO’s revenue has risen from $17.3 billion to $22 billion over the same period. Now, this is inclusive of the logistics business for better comparison. XPO completed the spin-off of its logistics business in Aug 2021.
- If we were to look at XPO’s revenue excluding logistics, it increased from $11.3 billion in 2018 to $12.8 billion in 2021.
- For FedEx, revenue growth over the recent quarters was driven by shelter-in-place restrictions, resulting in more online orders, aiding its ground shipments. Our FedEx Revenues dashboard provides more details on the company’s segments.
- For XPO, the revenue growth is being driven by the increased contribution of Truck Brokerage over the recent past. This segment saw revenue growth of 63% y-o-y in 2021, and it accounted for 21% of the company’s total revenue in 2021, compared to less than 17% contribution in 2020.
- FedEx’s last three-year revenue CAGR of 9% is better than 2% CAGR for XPO.
- Looking forward, with the economies opening up, the residential volume of ground deliveries is likely to grow at a slower pace compared to what we saw during the pandemic induced shelter-in-place restrictions.
- For perspective, FedEx’s average daily volume for ground shipments was up 23% in fiscal 2021 (fiscal ends in May), driven by e-commerce growth. However, the average daily volume for ground shipments was up only 2% in the first half of fiscal 2022, as people started to venture out of their homes.
- FedEx’s revenue is expected to grow faster than XPO over the next three years. The table below summarizes our revenue expectation for the two companies over the next three years and points to a CAGR of 5.9% for FedEx, compared to a CAGR of 3.2% for XPO, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for companies negatively impacted by Covid and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
2. FedEx Is More Profitable, And It Comes With Lower Risk
- FedEx’s operating margin of 8% over the last twelve-month period is much higher than 2% for XPO. The recently released full-year 2021 results for XPO points toward a 5% operating margin in 2021.
- Our FedEx Operating Income and XPO Logistics Operating Income dashboards have more details.
- FedEx’s free cash flow margin of 10% is also better than 5% for XPO.
- Looking at financial risk, FedEx beats XPO with its better debt and cash position. FedEx’s 34% debt as a percentage of equity is lower than 46% for XPO, while its 8% cash as a percentage of assets is higher than 3% for the latter, implying that FDX stock, with its better debt and cash position, offers lower financial risk compared to XPO stock.
3. The Net of It All
- We see that FedEx has demonstrated better revenue growth, and it is more profitable than XPO. It also offers lower financial risk, justifying the valuation gap.
- However, looking at a valuation based on P/EBITDA, both the stocks are comparable. At its current levels, FDX stock represents a P/EBITDA multiple of a little over 5x based on FedEx EBITDA for the last twelve months, while XPO stock represents a P/EBITDA of a little under 5x based on XPO Logistics EBITDA for the last twelve months.
- We believe FedEx is currently the better choice of the two, looking at prospects, using P/S as a base due to high fluctuations in P/E and P/EBIT. The table below summarizes our revenue and return expectation for FDX and XPO over the next three years and points to an expected return of 19% for FDX over this period vs. -4% expected return for XPO stock, implying that investors are better off buying FDX over XPO, based on Trefis Machine Learning analysis – FedEx vs. XPO Logistics – which also provides more details on how we arrive at these numbers.
While FDX stock may outperform XPO, the Covid-19 crisis has created many pricing discontinuities that offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Acuity Brands vs. FedEx.
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