After an 11% fall year-to-date, at the current levels, we believe FedEx stock (NYSE: FDX) is undervalued. FDX stock fell from around $260 in early January to under $230 now. The YTD 11% fall for FDX marks an outperformance with -20% returns for the broader S&P500 index.
Looking at the longer term, FDX stock is up 50% from levels seen in late 2019. This marks a slight underperformance compared to its largest peer – UPS stock – which has given a 55% return over this period. This compares with an 18% rise for the broader S&P 500 index.
This 50% rise for FDX stock since late 2019 was driven by: 1. FedEx’s earnings, which rose 32% to $20.61 in fiscal 2022 (fiscal ends in May), compared to $15.57 in 2019, on a per share and adjusted basis, and 2. the company’s P/E ratio, which grew 13% to 11.1x currently (trailing adjusted earnings), from 9.8x. The earnings growth was primarily driven by higher revenues, as discussed below.
FedEx’s revenue grew 34% to $93.5 billion in fiscal 2022, compared to $69.7 billion in 2019, driven by shelter-in-place restrictions and the spread of the Covid-19 virus, resulting in more online orders, aiding its ground shipments since the beginning of the pandemic. For perspective, FedEx Ground segment revenues surged 61% between 2019 and 2022. With the worst of the pandemic likely behind us, the volume of ground deliveries has declined with people venturing out of their homes. Still, at current levels of 9.9 million, the average daily volume for ground shipments is much higher than under 9.0 million in 2019. Similarly, the yield has increased 19% to $10.64 in 2022 vs. $8.97 in 2019.
Looking forward, the company will likely see steady revenue growth across its segments over the coming years. However, near-term headwinds may weigh on the overall revenue growth in the next few quarters. Unlike the double-digit annual growth seen in fiscal 2021 and fiscal 2022, we forecast a mid-single-digit annual revenue growth over the next few years.
FedEx’s adjusted net margins of 6% in fiscal 2022 were similar to 2019. The company’s management expects its operating margins to expand in fiscal 2023, driven by better revenue quality and increased reliance on technology. FedEx’s total shares outstanding rose <1% to 267 million in fiscal 2022 vs. 265 million in 2019.
Although FedEx appears to have strong prospects, it faces headwinds from the current weakness in broader markets. The S&P500 has now entered the bear market territory with rising concerns of slowing economic growth given the high inflation, Fed action, and supply chain disruptions. These factors are likely to impact FedEx’s performance, as well.
However, some of these factors appear to have already been priced in by the investors, given the 11% decline in FDX stock. We estimate FedEx’s valuation to be $299 per share, reflecting a 30% upside from its current market price of $230, implying that investors are likely to be better off buying FDX stock in the recent dip for solid gains in the long-term. At its current levels, FDX stock is trading at just 10x forward adjusted earnings, compared to an average of 14x seen over the last three years, making the stock attractive from a valuation point of view.
While FDX stock looks like it can see higher levels, it is helpful to see how FedEx’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, the Covid-19 crisis 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 FedEx vs. Amerco.
With inflation rising and the Fed raising interest rates, among other factors, FedEx stock has fallen 11% this year. Can it drop more? See how low FedEx stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||1%||-20%||71%|
|Trefis Multi-Strategy Portfolio||5%||-23%||208%|
 Month-to-date and year-to-date as of 7/6/2022
 Cumulative total returns since the end of 2016