FedEx Inc. Stock Report

FedEx Inc.

The graph of the annual revenue per share (red line) for FedEx shows steady growth – but with a slowdown more recently.

Adjusted earnings per share had grown at a very strong rate from 2009 to 2018. Fiscal 2019 was flat and fiscal 2020 had  sharp decline due to global trade issues and some higher costs plus the early impacts of the pandemic.

The adjusted earnings line is quite far below the revenue line which is due to this being a relatively low net profit margin business. The relatively low net profit on sales (currently down to 4.0%) is part of the reason that earnings can drop very quickly as revenues drop. But it also means that profits can rise very quickly when things improve.

The book value per share (green line) did not grow much through 2016, partly due to share buy backs, but grew in 2017 and 2018 with higher earnings and a pause in share buy backs in 2018 (later resumed in 2019 but with apparently no shares bought back in 2020 despite the lower share price).

FedEx (FDX,NY)
RESEARCH SUMMARY  
Report Author(s): InvestorsFriend Inc. Analyst(s)
Author(s)’ disclosure of share ownership:  Author(s) hold shares
Based on financials from: May ’20 Y.E. + Q1 ’21
Last updated: October 29, 2020
Share Price At Date of Last Update:  $                            264.00
Currency: $ U.S.
Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): Weak Buy / Hold at $264
Qualifies as a stock that could be bought with confidence to hold for 20 years? Probably, yes
Has Wonderful Economics? Good but volatile
Has Excellent and Trustworthy Management? Good, not great
Likely to grow earnings per share at an attractive rate over the next decade? Yes
Positive near-term earnings outlook? Yes
Valuation? Neutral in attractiveness at best
SUMMARY AND RATING: This cell of the report summarizes information from the other cells. FedEx historically qualifies as a moderately “great company with historic good growth in revenue and earnings per share. But it has been surprisingly volatile. It faltered significantly during the 2008 recession and took years to recover and more recently faltered significantly with the global manufacturing / industrial / trade slowdown of the past few years and/or due to competitive issues. But in its most recent quarter earnings have soared due to the pandemic and online shopping / parcel deliver.  The near-term outlook is for strong continued growth due to the pandemic. The long term outlook for revenue growth thereafter does seem reasonably predictable although probably relatively modest. The value ratios (based on trailing adjusted earnings) would support only a Weak Buy / Hold rating at best. FedEx has the competitive advantage of scale and top-of-mind brand name. The insider trading signal is  negative. The very recent earnings trend has turned quite positive with the pandemic but came after a 18 months of earnings declines. Management has been considered good and trustworthy but has had some struggles operationally such as the extremely slow integration of its TNT acquisition in Europe.  The company does well on most of the key Buffett criteria but does require continuous capital spending.  Overall, we rate FedEx a Weak Buy / Hold at this time.
LONG TERM VALUE CREATION. (Updated Q1 fiscal 2021) FedEx has exhibited excellent long-term value creation given current investor invested capital of $3.4 billion and accumulated earnings (after deducting a modest amount of dividends) of $26.1 billion. After deducting share buy backs its book equity is $19.5 billion which the market values 3.6 times higher at $69.4 billion. In effect something like $3.4 billion in capital raised from investors has been turned into $69 billion of value. As further evidence of the value creation, FedEx went public in 1978 at $0.75 per share (adjusted for splits). We are not aware if it subsequently issued additional shares at higher prices other than through the exercise of options. Of course, most of the huge percentage value creation occurred in the early or at least earlier years.
DESCRIPTION: (Updated November 2018). A huge transportation company with $69 billion in annual revenue and $68 billion in assets it operates in virtually every country in the world. It transports mostly small parcels and envelopes by air and ground mostly on a next-day-delivery basis but also offers less urgent delivery and delivers larger packages and freight as well. It has several main operating subsidiaries.   FedEx Express (which includes the TNT acquisition operating mostly in Europe) provides global express (mostly air but also substantial trucking) transportation and information networks to deliver priority parcel, envelop and freight delivery to more than 220 countries and territories   (57% of revenues, 39% of operating income). FedEx Ground provides express parcel and envelope delivery throughout the USA and Canada (31% of revenues, 49% of operating income).  FedEx Freight is a North American less-than-truck-load freight company (12% of revenues, 11% of operating income).  FedEx Services includes retail Office and centralized functions including customer services. The retail offices are a leading provider of document solutions (and a FedEx drop off point) with a global network of about 2,100 locations (2% of revenues, all income or loss is allocated to the other divisions). It appears that FedEx Ground is a far more attractive business than FedEx Express.  The company is labour intensive with about 450,000 employees and contractors (team members). Employee costs amount to 36% of its revenues. Another 24% is purchased transportation which is largely its independent contractors, owner operators of delivery trucks. This employee intensiveness means that costs are to a good degree variable with volume and this can help FedEx manage costs during recessions.
ECONOMICS OF THE BUSINESS: (Updated for Q1, fiscal 2020) The ROE based on trailing adjusted earnings is very good at  21.4% of ending equity (but is forecast to decline to about 17% in 2020) . Adjusted profits on sales were 5.7% in the trailing year which is not very attractive. This was slightly leveraged up to 5.8% profit on assets because sales are slightly larger than assets. This was further leveraged up to the 21.0% on ending equity as ending assets were 3.77 times larger than the common equity. Overall the ROE demonstrates  good economics but the profit on sales seems somewhat weak.
RISKS: The annual report provides a comprehensive list and discussion.  Amazon getting more into shipping is a risk. There is likely a risk of yet another large pension loss in fiscal 2021 due to lower interest rates. Strangely though, the Q1 2021 reports they will not make any contributions to their tax-qualified U.S. pension plans because those have ample funds. Possibly the recent pension losses are sort o f fake and could be reversed to advantage in future. Litigation concerning its position that its ground drivers are or were  contractors and not employees is a risk. Possibly advances in electronic document transmission and signatures could reduce the number of documents being shipped. A huge 2017 recent cyber attack illustrates the risk in that area.
INSIDER TRADING / INSIDER HOLDING: Based on insider trading from January 1, 2020 to October 28, 2020. There appears to be an accelerated level of share sales in 2020 compared to 2019. Share sales increased as the price rose in recent months. In almost all cases this is after exercising options.  Overall considering that selling after option exercised is “normal” but considering the recent price increase, the insider trading signal is negative.
WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is simple to understand (pass, basically picking up small parcels and delivering them albeit with a very complex system), has favorable long-term economics due to cost advantages or superior brand power (marginal pass given dominant position but tempered by low margins), apparently able and trustworthy management (marginal pass with respected founding CEO but has failed to meet projections in recent years and we are concerned about their approach to adjusted earnings), a sensible price – below its intrinsic value (pass), Other criteria that have been attributed to Buffett include: a low debt ratio (pass), good recent profit history (fail) little chance of permanent loss of capital (pass) a low level of maintenance type capital spending required to maintain existing operations excluding growth (apparent fail – aircraft and trucks may require constant spending).
MOST RECENT EARNINGS AND SALES TREND: Adjusted earnings per share growth in the past four quarters, starting with the most recent quarter which was Q1, 2021, ended August 31, 2020) rose 60%, fell 59%, fell 53% and fell 50%. These figures can be affected by differences in what is considered an unusual item each quarter and it appears that management is less than logical in its  approach to the adjustments. Revenues per share growth in the past four quarters, starting with the most recent was plus 13%, minus 3%, plus 3% and minus 1%.  In fiscal 2020, (ended May 31) adjusted earnings per share fell 39% and revenues per share rose 0.5%.  In fiscal 2019, (ended May 31) adjusted earnings per share rose 2% and revenues per share rose 9%. In fiscal 2018 (ended May 31, 2018) adjusted earnings per share growth was 24% (boosted by lower income tax rates) and revenue per share growth was 8%. Overall, the recent earnings growth trend had turned sharply in fiscal 2020 abut then turned very sharply higher in the latest quarter mostly due to benefits from the pandemic (more home shopping and passenger airlines -=which also carry parcels not flying)negative. The definition of adjusted earnings is aggressive in adding back ongoing integration costs and possibly ongoing pension losses. Per share data was boosted by aggressive share buy-backs although this has ceased due to the pandemic.
COMPARABLE VOLUME SALES: FedEx Express (mostly Air) Daily package volume growth in the past four quarters beginning with the most recent which was Q1 fiscal 2021 ended August 31, 2020, was up 5%, down 13% (pandemic), down 1%, and down 2%. Price yield per package was down 2%, down 1%, down 1%, and down 2%. FedEx Ground daily package volume growth was up a massive 31%, up 25%, up 10% and up 7%. Price yield per package was up 2%, unchanged, unchanged, and unchanged and Freight division shipments in the same quarters were down 9%, down 19%, down 5% and down 6%. Revenue per shipment was up 2%, up 4%, up 3% and up 2%. Overall, the recent volume of packages is growth is somewhat higher with the pandemic at FedEx Express (with passenger airlines who also take freight mostly grounded) and the revenues per shipment at FedEx Express have declined. FedEx Ground volume growth has significantly surged with the pandemic and Freight volumes have declined noticeably with the pandemic and an earlier weak trend.
Earnings Growth Scenario and Justifiable P/E: The trailing P/E of 11.3 based on adjusted earnings is pricing in very little growth in the immediate and near term. But the company itself is projecting about a significant decrease in adjusted earnings this fiscal year and speaks of growth thereafter.
VALUE RATIOS: (Based on a $264 share price). The Price to book value is perhaps unattractively high for an asset intensive company at 3.6 (but it could be justified if the ROE is about to improve sharply). We use management’s view of adjusted earnings which does somewhat aggressively add back substantial integration expenses even though they have been ongoing for several years. It also adds back recent huge pension loss due to lower interest rates as well as goodwill write-offs. The trailing adjusted earnings P/E seems somewhat unattractively high at 24.3 – but that depends on future growth which is recently surging mostly due to the pandemic. The dividend yield is minimal at 1.0%, despite healthy annual dividend increases, as only what amounts to 24% of adjusted trailing earnings are paid out as a dividend. The ROE in the past fiscal year was strong at 13.8% and has rebounded to 15.1% in the trailing four quarters as Q1 of the current fiscal year was strong. Adjusted earnings per share for the past five fiscal years increased by only 1% compounded annually but that was because of a sharp decline in the latest year.  Sales per share were up a compounded  average of 9.8% per year in the past five fiscal years – and that’s despite no growth in the latest fiscal year.  Overall the value ratios based on results to date would only support a rating of Weak Buy / Hold.
SUPPORTING RESEARCH AND ANALYSIS  
Symbol and Exchange: FDX, New York
Currency: $ U.S.
Contact: investor.relations@fedex.com
Web-site: www.fedex.com
INCOME AND PRICE / EARNINGS RATIO ANALYSIS  
Latest four quarters annual sales $ millions: $71,490.0
Latest four quarters annual earnings $ millions: $1,786.0
P/E ratio based on latest four quarters earnings: 38.7
Latest four quarters annual earnings, adjusted, $ millions: $2,844.0
BASIS OR SOURCE OF ADJUSTED EARNINGS:   Added back various write-offs and one-time items identified by management. We deducted two additional gains in Q2 2017 that management identified but failed to deduct in their version of adjusted earnings and also costs related to a cyber attack and hurricanes identified but not adjusted by management in Q1 2018. Also an income tax benefit in Q2 2020 that management failed to adjust for and gave a confusing reason of why not.
Quality of Earnings Measurement and Persistence: Reasonably Reliable, most expenses are cash expenses and the depreciation expense although estimated is only about 5% of revenue (fiscal 2020) and not that large in relation to wage expenses but it is large in comparison to net earnings. Also with assets 48% depreciated the provision appears to be ample.  The business operates on a cash or very short receivables basis so the measurement of revenues and current assets are likely quite accurate.  Earning growth persistence had been strong historically but earnings were hit hard with the 2008 recession and took several years to recover. Then, they were hard-hit in fiscal 2020 with a global slowdown and trade wars. Management is aggressive in adding back integration expenses for TNT despite that they have occurred for four years and counting. The pension and post-retirement health care costs are large and difficult to estimate and negatively impact earnings reliability.
P/E ratio based on latest four quarters earnings, adjusted 24.3
Latest fiscal year annual earnings: $1,286.0
P/E ratio based on latest fiscal year earnings: 53.8
Fiscal earnings adjusted: $2,494.0
P/E ratio for fiscal earnings adjusted: 27.7
Latest four quarters profit as percent of sales 4.0%
Dividend Yield: 1.0%
Price / Sales Ratio 0.97
BALANCE SHEET ITEMS  
Price to (diluted) book value ratio: 3.57
Balance Sheet: (Updated Q1, fiscal 2020 ended August 31, 2019) 46% of the assets are in property and equipment (Planes, trucks, buildings, sorting equipment…). (The property and equipment is 49% depreciated which might suggest that the depreciation expense has been ample). 20% of assets are leases all have to be capitalised under new accounting rules. 16% of assets are in (largely) receivables plus prepaids and inventory, Purchased goodwill represents 10% of assets (but, importantly, 38% of equity). Cash represents 3.5% of assets.  The remaining 5% is in other assets. These assets are financed 27% by equity (the great majority of which is retained earnings rather than original invested capital which testifies to the historic profitability of the company),  27% by debt, 21% by capitalized operating lease liabilities, 14% by current payables and accruals , 6% by pension obligations, 4% by deferred income tax and 1% by self-insurance accruals.  This is a relatively strong balance sheet.
Quality of Net Assets and Book Value Measurement: With a recent price to book ratio at 3.6, it’s worth considering the true value of the assets although it is earnings that the company is valued for. The assets are high quality, mostly consisting of planes, vehicles, package handling equipment and buildings. Purchased goodwill is relatively modest at 9% of assets but that is still a large 34% of equity. It is impossible to say to what extent the market value of the assets exceeds the book value but clearly, they do. The company is valued for its earnings not its assets.
Number of Diluted common shares in millions:                                 263.0
Controlling Shareholder: (Updated from 2019 circular)  F.W. Smith Chairman and  (founding) CEO owns 7.93% of the shares but does not technically control the company. There is substantial institutional ownership and four funds are shown as owning from  5.7% to 7.5% each. Collectively the institutional investors could likely control the Board selection if they wished to but meanwhile effective control likely lies with the founder and CEO.
Market Equity Capitalization (Value) $ millions: $69,432.0
Percentage of assets supported by common equity: (remainder is debt or other liabilities) 25.1%
Interest-bearing debt as a percentage of common equity 120%
Current assets / current liabilities: 1.7
Liquidity and capital structure: Highly liquid with a manageable debt level (120% debt to equity ratio). S&P rates it only a BBB as of the 2020 annual report which seems (unfairly?) low.
RETURN ON EQUITY AND ON MARKET VALUE  
Latest four quarters adjusted (if applicable) net income return on average equity: 15.1%
Latest fiscal year adjusted (if applicable) net income return on average equity: 13.8%
Adjusted (if applicable) latest four quarters return on market capitalization: 4.1%
GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE  
5 years compounded growth in sales/share 9.8%
Volatility of sales growth per share:  Steady but growth falters during recessions
5 Years compounded growth in earnings/share 6.1%
5 years compounded growth in adjusted earnings per share 1.2%
Volatility of earnings growth:  Volatile in recessions
Projected current year earnings $millions: $0.0
Management projected price to earnings ratio: #DIV/0!
Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in (adjusted)  earnings per share? Yes, long term
Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: 10.5%
More conservative estimate of compounded growth in earnings per share over the forecast period: 0.0%
More optimistic estimate of compounded growth in earnings per share over the forecast period: 4.0%
OUTLOOK FOR BUSINESS: In the current quarter, FedEx’s earnings should continue to grow strongly due to the overall impacts of the pandemic. And this is despite somewhat lower volumes in Express and Freight as the ground parcel segment has surged. Analysts appear to be predicting a 60% increase in adjusted earnings per share in the next year. FedEx has maintained their long-term goal of increasing earnings per share by 10 to 15% annually.
LONG TERM PREDICTABILITY: FedEx would appears to be reasonably predictable in terms of future growth. However, growth does depend on global growth and global trade growth. The company has a goal of growing earnings per share 10 to 15% annually. In part, the outlook for the next few quarters or even several years depends on the path of the pandemic.
Estimated present value per share: We will not calculate this at this time because earnings in the past year were unusually low but then have soared in the latest quarter with the pandemic such that we don’t have a stable earnings figure upon which to make a growth assumption.
ADDITIONAL COMMENTS  
INDUSTRY ATTRACTIVENESS: (These comments reflect the industry rather than any particular company.) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition (pass on a world-wide scale, great amount of competition at the local and regional level).  Barriers to entry (Pass with some barriers such as scale).  No issues with powerful suppliers (pass). No issues with dependence on powerful customers (pass, well diversified customer base), No potential for substitute products (marginal pass as although customers are seeking lower cost alternatives but they are slower and the internet may be an alternative to shipping documents). Overall this industry appears to be attractive for FedEx as a large incumbent .
COMPETITIVE ADVANTAGE: Its scale and global coverage offer a competitive advantage. Its top-of-mind brand awareness and the fact that customers would face some inconvenience in switching (learn new package booking procedures) gives it barriers to entry.  Its competitive advantage seems strongest in air and priority ground (although for some reason Express has achieved only low margins) but may not apply to its less than truckload operations.
COMPETITIVE POSITION: FedEx Ground market share is over 30% and relatively stable (and the market itself is growing rapidly). FedEx Freight market share is about 18% of the less-than-truckload market and rising. (September 2020 presentation). FedEx Express market share not noted in presentation.
RECENT EVENTS: Adjusted earnings had been very disappointing for bout 18 months but then turned sharply higher in the latest quarter due to benefits from the pandemic. FedEx canceled certain contracts with Amazon and views Amazon as a competitor. There was a write off of goodwill related to FedEx office in Q4 fiscal 2020.  There was a write-off of the goodwill in its Supply Chain management operations in Q4 2018.  FedEx has been raising most of its rates by 4.9% annual for the last five years and will do so again in 2021. But revenue growth per item has lagged that figure due to customers opting for cheaper non-express service. And, strangely, the revenue per package seems to be dropping in almost all of the Express categories. This is partly due to lower fuel surcharges but may also be due to more discounting of supposed list prices.  FedEx Ground went to 6 day a week operation in 2019 and as of January 2020 has  expanded residential delivery to seven days per week and reaches 95% of the U.S. population.
ACCOUNTING AND DISCLOSURE ISSUES: The company reports changes in volume shipped (not just dollars) which is helpful. The summary earnings release is brief but to the point. There was a particularly good discussion of pension accounting issues. The annual report provides excellent and yet concise detail by segment. But, some write-offs in the past were described as “non-cash” which seems a bit dismissive of losses. A recent change to marking the net pension liability to market has added great  volatility to GAAP earnings. In Q2 2017 they failed to deduct some unusual gains in adjusted earnings. In Q1 2018 quarter they could have added back costs associated with a cyber attack but did not, so they are being conservative there. They indicate that starting fiscal 2018 they will no longer adjust for amortization of purchased intangibles. We think that should be adjusted for (which would add to adjusted earnings). Amortization of intangibles is not separated out from depreciation in the earnings news release. They are adjusting earnings for the costs of integrating TNT over about five years (and counting!). Adding back costs that will occur for five years could be seen as aggressive although an argument can be made that this does give the best view of normalized earnings. Some adjustments to earnings and items not adjusted have been very confusing. They speak of “We have not included tax benefit…in the adjustment” when it would be more clear to say we have not adjusted for the tax benefit. (And the reason for not adjusting was not convincing).
COMMON SHARE STRUCTURE USED: one vote one share
MANAGEMENT QUALITY: Management quality has been good historically. But there have definitely been recent stumbles and an inability to meet profit targets (at least prior to the latest quarter which was strong due to the pandemic) . Management appears to have made good cost cutting measures in recent years. Still led by its founder. The nature of the information in the annual report suggests a shareholder oriented management that understands what drives profitability. However there were some past mistakes. It probably over-paid for certain acquisitions including Kinkos and more recently a Supply Chain management business and quite likely its TNT acquisition which has been problematic. It apparently made smart choices in repurchasing shares in 2014 through 2017 at apparently good prices. They missed an opportunity to buy back more shares at better prices in 2012. More recent share buy backs at higher prices averaging, for example $266 in January 2018 and  $191 in April 2019 may not have been at all wise. Recently they have chosen to align with retailers in opposition to Amazon and this could prove to be a strategic error.
Capital Allocation Skills: Management appears to have historically made reasonably good choices in investing its capital and in its financing. It has spent heavily on share repurchases at prices that were attractive although it could have  done so earlier at more attractive prices. However, more recent share repurchases (For example, January 2018 averaged $266 and April 2019 averaged $190) now appear unwise as the share price has declined.  The dividend payout ratio is only about 17%. With an ROE that is typically in double digits, and recently over 20%, on an equity base that has increased substantially in the past ten years there is no indication that capital spending and acquisitions have been unwise. (However, the TNT acquisition may yet prove to have been unwise)  And there have been large write-offs of goodwill in regard to its acquisition of the former Kinkos retail services outlets indicating that this particular acquisition may not have been wise and there was a write-off in 2018 of the goodwill of a purchased supply chain management company.
EXECUTIVE COMPENSATION: Updated for 2020 fiscal figures.  Generous ranging from $4 to $11 million for the named executives for fiscal 2020.  Compensation was reduced by a small amount in fiscal 2019 and 220 (and a larger amount for the CEO) but still ranged up to $11 million.  Overall the compensation is not a concern given the size of the company.
BOARD OF DIRECTORS: (From 2019 proxy circular document) The Board appears to be suitably qualified. Director compensation is about $300,000 per year, which could limit independence. Overall it is probably a good Board
Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed  analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry.
DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice.
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