After a 36% fall year-to-date, we believe FedEx stock (NYSE: FDX) is undervalued at the current levels. FDX stock fell from around $260 in early January to about $165 now. The YTD 36% fall for FDX marks an underperformance with -17% returns for the broader S&P500 index.
Looking at the longer term, FDX stock is up just 8% from levels seen in late 2019. This marks a significant underperformance compared to its largest peer – UPS stock – which has given around 45% returns, and the broader S&P500 index, up 22% over this period.
This 8% rise for FDX stock since late 2019 can be attributed to 1. a 27% rise in FedEx’s adjusted EPS to $19.73 for the last twelve months, vs. $15.57 in 2019, partly offset by 2. a 15% fall in its P/E ratio to 8.4x currently, vs. 9.8x in 2019.
FedEx’s revenue grew 36% to $94.8 billion for the last twelve-month period, 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 fiscal 2019 and 2022.
However, the big e-commerce surge seen through the lockdown phase of the Covid-19 pandemic is now cooling off, evident from declining volumes of logistics companies. FedEx saw its express segment average daily package volume declined 11% y-o-y in Q1 FY2023. Its ground segment’s average daily volume also fell by 3%. That said, the revenue trended higher, driven by better yields.
FedEx’s adjusted net income margin fell 7% or around 40 bps since 2019 to 5.5% now. The company saw its operating costs rise more in Q1 fiscal 2023, resulting in a 130 bps fall in operating margin to 5.1%. Our FedEx operating income comparison dashboard has more details. To reduce costs, the company has decided to close some offices, cut its flight frequencies, and cancel some network capacity projects, among other actions. The company also withdrew its earnings guidance for fiscal 2023. This did not sit well with investors, resulting in much lower levels for FDX stock.
FedEx faces near-term headwinds from rising costs and declining volume. Furthermore, given the challenging macroeconomic environment with overall growth slowing down, the company is expected to have a tough fiscal 2023. However, many of these factors appear to have already been priced in by the investors, given the 36% decline in FDX stock this year. We estimate FedEx’s valuation to be $235 per share, reflecting a significant 40% upside from its current market price of around $165, 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 11x forward expected adjusted earnings of $14.75, compared to an average of 15x seen over the last five 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 at 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 36% 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||2%||-17%||77%|
|Trefis Multi-Strategy Portfolio||4%||-19%||222%|
 Month-to-date and year-to-date as of 11/10/2022
 Cumulative total returns since the end of 2016