FedEx (NYSE: FDX)
QVI Research Report | Updated Coverage | April 2023
Summary
Despite its challenges in recent years, facilitating the founder stepping down as its long-time CEO, FedEx remains a formidable operator in the air freight and logistics industry.
Following QVI’s initial bullish coverage in early 2022 and a 30% run-up in the stock price YTD 2023, shareholder yields, fundamentals, and valuation multiples now appear as a mixed bag.
Although downside risks remain below average, investor and analyst sentiment seems bullish or bearish.
It’s anybody’s call; however, based on my proprietary research checklist, Quality Value Investing has changed its rating on FedEx and its stock in this updated report.
Premium (paying) subscribers: When referencing this research report, access your Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the market close on April 12, 2023, and intended for illustration only.
FedEx Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
FedEx Corporation (NYSE: FDX) is a dividend-paying large-cap stock in the industrials sector’s air freight and logistics industry. FDX was added to the QVI Expanded Portfolio on February 2, 2022, at a split and dividend-adjusted $245.31 a share.
FedEx Corporation provides transportation, e-commerce, and business services in the United States and internationally.
The company’s FedEx Express segment offers express transportation, small-package ground delivery, and freight transportation services; time-critical transportation services; and cross-border enablement, technology, and e-commerce transportation solutions. Its FedEx Ground segment provides day-certain delivery services to businesses and residences. The company’s FedEx Freight segment offers less-than-truckload freight transportation services. As of May 31, 2022, this segment had approximately 30,000 vehicles and 400 service centers. Its FedEx Services segment provides sales, marketing, information technology, communications, customer service, technical support, billing and collection, and back-office support services. The company’s Corporate, Other, and Eliminations segment offers integrated supply chain management solutions, specialty transportation, customs brokerage, global ocean and air freight forwarding services, document and business services, and retail access to its customers for its package transportation businesses.
FedEx Corporation was founded in 1971 and is based in Memphis, Tennessee, USA.
QVI’s value proposition elevator pitch for FedEx:
Despite its challenges in recent years, facilitating the stepping down of founder and long-time hands-on CEO Fred Smith to become executive chairman, FedEx remains a formidable operator in the air freight and logistics industry.
Performance vs. Sector and Market
The chart below illustrates FDX’s performance against the Industrial Select Sector SPDR® Fund ETF (NYSE: XLI) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) since QVI’s initial coverage of FedEx in February 2022.
For example, FDX has underperformed its sector while topping the broader market in total returns during the coverage timeframe. Notably, the stock is up 29.45% year-to-date in 2023 from cost-savings efforts, a 10% dividend hike, and analyst upgrades.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit FedEx’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the U.S. Securities and Exchange Commission or SEC.
QVI’s value proposition rating for FedEx: Bullish.
FDX Total Return vs. XLI and SPY
FedEx Corp (FDX) Total Return: -5.64%
Industrial Select Sector SPDR ETF (XLI) Total Return: -1.43%
SPDR S&P 500 ETF Trust (SPY) Total Return: -8.61%
Since February 2, 2022 (as of April 12, 2023)FDX Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
FDX’s earnings yield traded below the targeted floor at 5.05%, as demonstrated in the below chart. Moreover, at 3.55%, FDX’s free cash flow yield traded far under the threshold.
As inverse valuation multiples, the earnings and free cash flow yields suggest that FDX trades at a premium. QVI will further explore valuation multiples later in this report.
Dividend Yield
FedEx offers a modest forward dividend yield of 2.00%, supported by a conservative 27.22% payout ratio, thus indicating a safe dividend rate with room for additional annual increases.
FDX yielded 2.05% from an annual payout of $5.04 on a split- and dividend-adjusted cost basis of $245.31 per share on February 2, 2022, the date of QVI’s initial stock coverage. Thus, our yield-on-cost basis was a mere +5 basis points (bps) above the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 3.40% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for FDX was 3.53% or a mere +13 bps above the 10-Year and 3.55% or just +15 bps above the Treasury yield when using QVI’s February 2022 yield-on-cost basis.
QVI’s shareholder yields rating for FDX: Neutral.
FDX Shareholder Yields
FedEx Corp (FDX) Price: $229.48
FedEx Corp (FDX) Earnings Yield: 5.05%
FedEx Corp (FDX) Free Cash Flow Yield: 3.55%
FedEx Corp (FDX) Dividend Yield: 2.00%
One-Year Trailing (as of April 12, 2023)FedEx Fundamentals
QVI Research Report’s fundamentals section measures the performance strength of the company’s senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the below chart, FedEx had positive three-year annualized revenue growth of 10.30%, underperforming the 14.86% median growth of the industrials sector.
Further down the income statement, FedEx had a trailing three-year low single-digit net profit margin of 3.82%, underperforming the sector’s median net margin of 6.50%.
Returns on Equity and Invested Capital
FedEx’s management produced a trailing three-year return on equity or ROE of 14.85%, in line with the targeted threshold and the sector’s median ROE of 13.83%.
Stock buyback programs often elevate ROE. For example, FedEx’s board of directors authorized stock buybacks of $2.2 billion in fiscal 2022.
At 7.69%, FedEx’s three-year return on invested capital, or ROIC, is below the QVI threshold but in line with the sector’s median ROIC of 7.02%, indicating that its senior executives are average capital allocators.
However, FedEx’s ROIC barely covers its weighted average cost of capital, or WACC, of 7.11%. (Source of WACC: GuruFocus).
Despite double-digit revenue growth, the low single-digit profit margin and modest returns on equity and invested capital suggest that FedEx’s management has further challenges or is awaiting the fruits of its well-publicized cost-cutting program.
QVI’s fundamentals rating for FedEx: Neutral.
FDX Returns on Management
FedEx Corp (FDX) Revenue Growth (3y CAGR): 10.30%
FedEx Corp (FDX) Profit Margin (3y Median): 3.82%
FedEx Corp (FDX) Return on Equity (3y Median): 14.85%
FedEx Corp (FDX) Return on Invested Capital (3y Median): 7.69%
Three-Year Trailing (as of April 12, 2023)FDX Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, and overall investment thesis of FedEx Corporation (FDX), including potential catalysts. So let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have no beneficial positions through direct ownership of any shares mentioned thus far in this report. I wrote this post myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
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About the Writer
David J. Waldron is contributing editor of Quality Value Investing and author of the international-selling book, Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. He received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University. David and his wife, Suzan, reside in historic South Central Pennsylvania, USA.
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