Stock of the week - FedEx (27.03.2024)

• FedEx reported fiscal-Q3 2024 earnings last Thursday
• Sales missed expectations but profits surprised to the upside
• Big margin expansion in key Express segment
• Cost-cutting measures seem to be effective
• Company expects small drop in fiscal-2024 revenue
• New $5 billion buyback program authorized
• Stock made the biggest single-day jump in a year

FedEx (FDX.US) has been one of the best performing companies from the Russell 1000 index over the past week. Company released fiscal-Q3 2024 earnings report last week and while the results were mixed, the buyback announcement triggered a share price jump. Let's take a quick look a recent earnings release from the company, how its valuation looks like and what the chart tells us!

Mixed earnings report - sales drop while profits jump

FedEx released earnings report for fiscal-Q3 2024 (calendar December 2023 - February 2024) on Thursday last week. Overall, report turned out to be mixed. Company reported weaker-than-expected sales, with FedEx Express and FedEx Freight driving year-over-year sales drop. However, company managed to report much better profits than expected. Adjusted operating income jumped 16.5% YoY, while adjusted net income was 11.7% YoY higher. Adjusted EPS also improved considerably, jumping from $3.41 a year ago to $3.86 now.

What seems to be the highlight of the release is margin data. While company reported a weaker-than-expected adjusted operating margins in Ground and Freight segments, margin in its key Express segment improved considerably, beating expectations and nearly doubling from a year ago quarter. A rather sizeable drop was reported in Freight profitability with adjusted operating margin dropping from 17.7% a year ago to 16.0% now. In the previous quarter (fiscal-Q2 2024) margin in this segment stood at 20.6%. Nevertheless, while Freight is FedEx segment with the highest margin, it is also the smallest segment, accounting for around 10% of company's revenue in the most recent period.

Fiscal-Q3 2024 earnings

• Revenue: $21.74 billion vs $22.05 billion expected (-1.9% YoY)
  • FedEx Express: $10.10 billion vs $10.12 billion expected (-2.4% YoY)
  • FedEx Ground: $8.70 billion vs $8.86 billion expected (+0.5% YoY)
  • FedEx Freight: $2.13 billion vs $2.18 billion expected (-2.8% YoY)
  • FedEx Services: $64.0 million vs $76.8 million expected (-26.4% YoY)
• Adjusted operating expenses: $20.49 billion vs $20.92 billion expected (-3.0% YoY)
• Adjusted operating income: $1.36 billion vs $1.24 billion expected (+16.5% YoY)
  • FedEx Express: $256 million vs $117 million expected (+109.9% YoY)
  • FedEx Ground: $964 million vs $980 million expected (+14.2% YoY)
  • FedEx Freight: $340 million vs $392 million expected (-11.9% YoY)
• Adjusted operating margin: 6.26% vs 5.63% expected (5.28% a year ago)
  • FedEx Express: 2.3% vs 1.0% expected (1.2% a year ago)
  • FedEx Ground: 10.8% vs 11.1% expected (9.7% a year ago)
  • FedEx Freight: 16.0% vs 18.0% expected (17.7% a year ago)
• Adjusted EBITDA: $2.43 billion vs $2.29 billion expected (+10.4% YoY)
  • Adjusted EBITDA margin: 11.2% vs 10.4% expected (9.9% a year ago)
• Adjusted net income: $966 million vs $878 million expected (+11.7% YoY)
  • Adjusted net margin: 4.44% vs 3.88% expected (3.9% a year ago)
• Adjusted EPS: $3.86 vs $3.46 expected ($3.41 a year ago)
• Free cash flow: $231 million vs $678 million expected (-76.9% YoY)
• Capital expenditures: $1.38 billion vs $1.45 billion expected (+7.9% YoY)

Adjusted operating margins in Express and Ground divisions improved, while margin in Freight segment deteriorated. Source: Bloomberg Finance LP, XTB

While Freight is FedEx high margin business, it accounted for just around 10-15% of company's total revenue in the most recent quarters. Source: Bloomberg Finance LP, XTB

Company sees no improvement this fiscal year

Apart from releasing fiscal-Q3 2024 results, FedEx also published updated forecasts for the current fiscal year. Company still expects a 'low-single-digit' drop in full fiscal-2024 year (calendar June 2023 - May 2024). However, full-year adjusted EPS forecast was narrowed from  $17.00-18.50 range to $17.25-18.25 range. Also, FedEx expects a lower capital expenditure of $5.4 billion in the new forecast, compared to $5.7 billion in the previous forecast.

Full-year fiscal-2024 forecasts

• Revenue growth: 'low-single-digit drop'
• Adjusted EPS: $17.25-18.25 vs $17.00-18.50 in previous forecast
• Capital expenditures: $5.4 billion vs $5.7 billion in previous forecast

Company reported a smaller YoY revenue drop in Express and Freight segments than in previous periods. However, revenue growth slowed in Ground segment. Source: Bloomberg Finance LP, XTB

Buyback announcement supports share price

While fiscal-Q3 2024 results were mixed, the release triggered a jump on FedEx stock. On one hand, it was driven by the aforementioned improvement in margins in the Express segment. However, there are also other reasons behind the share price jump. FedEx cost-cutting measures seem to be effective with fiscal-Q3 2024 being the third month in a row when the company's profit increase in spite of declining sales. Company said that its ongoing overhaul plan has already resulted in cost reductions of $1.8 billion. This was welcomed by analysts, who began to boost their stock recommendations and profit targets. Moreover, better cost discipline allows the company to share more profits with investors - FedEx authorized a new $5 billion share buyback program. This comes in addition to around $600 million left under an existing program adopted in 2021.

FedEx shares made the biggest single-day jump in a year after the company announced a new buyback program. Source: Bloomberg Finance LP, XTB

A look at valuation

Let's take a quick look at FedEx' valuation with 3 often used valuation methods - DCF, multiples and Gordon Growth Model. We want to stress that those valuations are for presentation purposes only and should not be viewed as recommendations or target prices.

Discounted Cash Flow

Let's start with probably the most popular fundamental model for valuing stocks - Discounted Cash Flow method (DCF). This model relies on a number of assumptions. We have decided to take a simplified approach and base those assumptions around averages for the past 5-years. Detailed forecasts for 10 years were made, with terminal value assumptions being set as follows - 3% terminal revenue growth and 6% terminal weighted cost of capital (WACC). Such a set of assumptions provides us with an intrinsic value of FedEx shares of $288.64 - more or less in-line with yesterday's cash close. Terminal value forecast accounts for around 77% of DCF valuation.

A point to note is that the intrinsic value obtained via the DCF method is highly sensitive to assumptions made. A sensitivity matrix for different sets of Operating Margin and Revenue Growth assumptions have been provided below.

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

Multiples

Next, let's take a look at how FedEx valuation compares with peers. We have constructed a peer group consisting of 6 companies, which are considered to be FedEx competitors. Those include United Parcel Services, DHL Group, DSV, CH Robinson, Expeditors International of Washington and ZTO Express. We have taken a look at 6 different valuation multiples - P/E, P/BV, P/S, P/FCF, EV/Sales and EV/EBITDA.

Averages for different multiples have been calculated. We have decided to use median multiples in valuation calculations, but in case of the stocks being analyzed it is not as important as mean, median and cap-weighted averages are very similar. As one can see in the table below, most of the valuations obtained this way are significantly above current market price. Trimmed average of those median valuations (excluding the highest and the lowest level) suggest an intrinsic value of FedEx shares of almost $430 - nearly 50% above yesterday's cash close.

Source: Bloomberg Finance LP, XTB Research

Gordon Growth Model

Let's move to the third valuation method - Gordon Growth Model. This method relies on dividends and given that FedEx is a dividend-paying stock with a long history of payouts, it can be used to value company's stock. We have assumed an 8% dividend growth rate as well as historical average required rate of return of 10%. Such a set of assumptions provides us with a valuation of $248.40 per FedEx share - around 14% below yesterday's cash close.

As it is usually the case with valuation models, the Gordon Growth Model is also highly sensitive to assumptions made. Sensitivity matrix for dividend growth and required rate of return assumptions are provided below. Green tiles show combinations that result in above-market valuation, and red tiles show combinations that result in below-market valuations.

Source: Bloomberg Finance LP, XTB Research

A look at the chart

FedEx (FDX.US) rallied over 7% on Friday, in response to the release of fiscal-Q3 2024 earnings after market close on Thursday. This was the biggest single-day jump for the stock in year! Taking a look at the chart at D1 interval, we can see that the stock launched Friday's trading with a big bullish prices gap (orange circle). This has pushed the stock above $282 resistance zone, marked with previous price reactions and 78.6% retracement of the downward move launched in late-May 2021, and to the levels not seen since late-July 2021. Should the upbeat sentiment towards the stock prevail, the next resistance zone to watch can be found in the $300 area.

Source: xStation5