Joe Raedle
Investment Thesis:
FedEx’s (NYSE:FDX) price has nearly made a full recovery from its September struggles and stands to take advantage of a few tailwinds such as a growing e-commerce industry. However, I find the challenges and risks facing FedEx to outweigh any potential benefits gained from buying, which leads me to recommend a HOLD in FedEx.
Benefits
As stated, there are a few things that FedEx has going for it. Package volume is likely to increase as a result of a growing e-commerce industry. Forbes said in 2017 that package volume tends to increase at a commensurate rate to GNP, which would insinuate a relatively stable increase in revenue in perpetuity. Morningstar’s assessment of FedEx’s infrastructure would suggest that it is more than well enough developed to keep up with rising volume with minimal changes.
Recently, FedEx Express’ revenue from package & freight increased from 2021 to 2022 (package improved from $32.48 billion to $35.69 billion, while freight improved from $8.18 billion to $8.71 billion). Total operating income increased by ~6.5%. On the other hand, the average daily package volume actually decreased by 7% from 2021 to 2022, and freight volume decreased by 5%. Revenue was propped up by improved yield per package. However, this trend is still somewhat worrisome to me because sustained decreases in volume are a threat to FedEx’s revenue base since there is only so much room for margin improvement to make up for volume decreases.
My earlier reference to FedEx’s infrastructure is another promising element of FedEx’s business — their massive fleets & package sortation footprint act as a narrow moat.
FedEx has also proven its longevity through its long history. FedEx has survived financial crises and abnormal circumstances and historically maintained growth. While they may have troubles in the near-term, I do not anticipate FedEx having many fundamental issues in the long term.
Valuation
FedEx’s valuation is fair. Currently, FedEx trades at a P/E and FWD P/E that are a fair amount lower than its sector, and its P/B is equally solid. Furthermore, FedEx has an EV/Sales figure of .87, and a very promising Price/Cash Flow of 5.42.
FactSet analysts place a fair price for FedEx at ~$195. Given FedEx’s proximity to this price, it is difficult to say that FedEx is undervalued. However, the metrics above, as well as Seeking Alpha’s B- valuation grade for FedEx, imply that FedEx is trading at a nearly fair price.
One last thing to mention here is that FedEx offers a quarterly dividend of $1.15, leading to a fairly competitive dividend yield of 2.2%. Unfortunately, this is where my praise of FedEx must come to an end.
Downside
FedEx is not without its share of problems. With the general shift to business-to-consumer (B2C) shipping, away from the business-to-business (B2B) shipping which has been historically dominant, parcel carrier margins have been pressured. Amazon’s (AMZN) development of its last-mile capabilities suggests potential new competition. FedEx also has faced wage pressure and a tight labor market, which are likely to increase operating expenses and eat into margins. Lastly, FedEx’s business is highly sensitive to economic downturns, and macroeconomic factors such as a potential 2023 recession may have negative impacts on FedEx in the near term.
Let’s dive into each of these factors individually. Residential deliveries are inherently lower yield than commercial deliveries because the per-package margins don’t make up for the increased cost of multiple stops. While FedEx has reduced its cost per package in recent years, I anticipate that B2C shipping will continue to make up greater and greater portions of FedEx’s revenue, and ensuring profitability on such shipments will likely take some investment on FedEx’s part.
While it is not a guarantee, I suspect Amazon may begin lending its last-mile shipping to shippers outside of its own network. If this were to occur, it may take market share away from FedEx and UPS (UPS), which would be detrimental for obvious reasons.
FedEx’s operating expenses increased by ~8% between 2021 and 2022, largely on the back of increased fuel costs and employee salary increases. Given the current nature of the wage market (as cited above), I find it likely that FedEx’s operating expenses will continue to face upward pressure from wages, which may cut into profits for the foreseeable future.
FedEx’s September dip was caused by their admission that macroeconomic trends are acting as significant headwinds for the company’s delivery volume. Given that a recession is very likely given a variety of macro factors such as inflation or high rates, FedEx’s business is likely to feel the pinch in the near term as volume shrinks.
Financials & Comps Analysis
Below is a chart comparing FedEx to its closest competitors.
| Total Revenue TTM | Price (daily) / Earnings | EBITDA TTM | Debt to Assets TTM | Return on Equity TTM | Operating Margin TTM | Basic EPS FY | Revenue % Growth TTM | |
| FedEx (FDX) | $94,091,000 | 14.92 | $8,936,000 | .44 | 13.48% | 6.23% | 14.54 | 5.07% |
| United Parcel Service (UPS) | $101,076,000 | 14.27 | $18,069,000 | .34 | 74.69% | 13.17% | 14.75 | 7.06% |
| Deutsche Post AG (OTCPK:DPSTF): | $101,744,098 | 9.00 | $13,565,447 | .32 | 28.93% | 9.09% | 4.85 | 21.40% |
Data sourced from Morningstar, Inc.
The data doesn’t look good for FedEx. Despite FedEx being of similar size to DHL and UPS, they fall behind the other shipping giants in nearly all other categories.
First up, profitability. Both in terms of ROE and margins, FedEx lags behind its competitors. Looking deeper, FedEx’s net profit margin has actually decreased since its 2021 highs, and with a potential recession looming, it is unlikely to rebound quickly. Furthermore, FedEx’s earnings volume is disappointing.
FedEx’s P/E ratio, while still reasonable for the sector, is unexceptional among the shipping giants, as is its EPS. The analysis of competition makes it clear that even many of FedEx’s supposed strengths, such as their reasonable valuation, are not unique to FedEx. It becomes clear from analyzing this data that UPS, the most relevant competitor to FedEx, has the advantage in size and profitability despite trading at similar P/E multiples.
FedEx lacks any distinctive, sustainable advantage over its competitors qualitatively. Despite its shipping infrastructure serving as a type of narrow moat against new competition, FedEx is far from being the industry leader. These factors, coupled with their somewhat subpar financial performance when compared to DHL and UPS, lead me to believe that FedEx is not the best investment in the industry.
The Bottom Line
I think it would be an overreaction to recommend selling FedEx. Despite all the negative factors I’ve listed, FedEx has enough upside potential to justify the hold. As I’ve stated, FedEx’s shipping infrastructure, the growth of the e-commerce industry, and relatively fair valuation all reflect well on the position. There are also other factors not mentioned in this article that bode well for FedEx, like the concluding integration of TNT. However, I do find FedEx to be somewhat lacking when compared to its competitors, especially UPS. Furthermore, I find margins to be pressured on many sides, such as expense increases and B2C shipping increases. Coupled with unfavorable macro conditions, this is enough to make me wary about FedEx’s performance in the near term. Therefore, I recommend a HOLD in FedEx.
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