FedEx: A study in contradictions

Recent Price $233
Dividend $4.60
Yield 2.0%
P/E Ratio 11
Shares (millions) 266.0
Long-Term Debt as % of Capital 32%
52-Week Price Range $282.88 - $192.82

 

The recent behavior of FedEx ($233; FDX) shares encapsulates our seemingly bizarre economic situation. A highly cyclical shipping stock rallies as recession fears build. The company missed consensus profit and sales estimates last quarter, typically a recipe for a big sell-off — yet its shares continue to push higher. FedEx shares have surged 9% since April, seemingly immune from the S&P 500 Index’s 8% retreat.

Scoring in the top quarter of our research universe for five of seven Quadrix® categories, the stock earns an Overall rank of 90. FedEx also scores above 90 for both sector-specific scores. FedEx, yielding 2.0%, is a Focus List Buy and a Long-Term Buy.

Backing up its upbeat stance

FedEx’s May-quarter results reflect the market’s mood as we enter June quarter earnings season, as investors may look past moderately disappointing results if management can offer assurance that the long-term outlook remains intact. FedEx’s earnings per share rose 37% on revenue growth of 8%, with both metrics narrowly missing consensus estimates. Three main factors weighed on the results: supply-chain problems, decelerating economic growth, and the tight labor market. Still, FedEx pushed through price hikes to counter lower volumes.

Management anticipates disruptions to global supply chains will continue in fiscal 2023 ending May. FedEx also expects inventory restocking to slow, hurting demand for its freight services. But airline capacity should remain tight, helping to support additional rate hikes.

FedEx said it expects higher shipping volumes in fiscal 2023, with earnings per share reaching $22.50 to $24.50 — good for growth of 9% to 19%, above the then-consensus of $22.40. This outlook was a true surprise, given that FedEx historically tends to issue full-year profit guidance with the midpoint of the range matching the consensus estimate, according to J.P. Morgan Chase ($112; JPM) analysts. Since that announcement, the consensus has risen to $23.00 per share, still leaving room for upside. FedEx has also said per-share profits should climb at a clip of 14% to 19% annually through fiscal 2025 on annual revenue growth of 4% to 6%.

Consistent with its bullish outlook, management’s recent actions appear similarly upbeat. Last month, FedEx announced a 53% dividend hike, its biggest annual increase since fiscal 2003. After that dividend boost, FedEx’s payout ratio is a modest 22%, leaving flexibility for more big hikes in coming years. The company also plans to repurchase $1.5 billion of stock in the first half of fiscal 2023, translating to 2.5% of outstanding shares at their current price.

Conclusion

With a trailing P/E ratio of 10, FedEx trades 13% below the median airfreight-and-logistics stock in the S&P 1500 Index and 53% below its own three-year norm.

If FedEx meets the current consensus profit estimate of $23.00 per share for fiscal 2023 and its trailing P/E ratio rises to 12, the stock would reach $276 over the next 12 months.

FedEx Corp., 942 S. Shady Grove Road, Memphis, TN 38120; (901) 818-7500; http://investors.fedex.com.

 

 

Quarter Per-Share Earnings* Sales Change Quarterly Price Range P/E Ratio
Range
May '22 $6.87 vs. 5.01 8% $241.57 - $192.82 13 - 10
Feb '22 4.59 vs. 3.47 10% 266.79 - 206.31 15 - 12
Nov '21 4.83 vs. 4.83 14% 268.98 - 216.34 15 - 12
Aug '21 4.37 vs. 4.87 14% 318.54 - 264.07 18 - 15

 

Year
(May)
Sales
(Bil.)
Per-Share Earnings* Per-Share
Dividend
52-Week Price Range P/E Ratio
Range
2022 $93.5 $20.61 $3.00 $318.54 - $192.82 15 - 9
2021 84.0 18.17 2.60 319.90 - 127.29 18 - 7
2020 69.2 9.50 2.60 178.50 - 88.69 19 - 9
2019 69.7 15.52 2.60 266.67 - 150.94 17 - 10

 

Quadrix Scores
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Perform-
ance
Reversion
90 75 83 77 44 79 56 38

 

* Earnings exclude special items.
NA Not Available.
Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.