After 85% Rally FedEx Stock Appears Fully Priced

After roughly an 85% rise since the March 23 levels of this year, at the current price of around $208 per share we believe the stock price of FedEx FDX (NYSE: FDX), one of the world’s largest parcel delivery companies, has reached its near term potential. FDX stock has rallied from $110 to $208 off the recent bottom compared to the S&P which moved over 50%, with the resumption of economic activities as lockdowns are gradually lifted. FDX stock is also up 32% from levels seen in late 2018.

FDX stock has not only fully recovered to the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic, it is now up 30% from the pre-crisis levels. This seems to make it fully valued, despite the company seeing an increase in shipments over the recent months.

Some of the 32% rise of the last 2 years is justified by the roughly 6% growth seen in FedEx’s revenues from fiscal 2018 to 2020 (fiscal ends in May), though earnings were down 38% due to a 44% net margin contraction from 6.4% to 3.3%. Higher insurance costs and competitive pricing are some of the factors that contributed to this decline.

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Despite the company posting an earnings decline in fiscal 2020, its P/E multiple has expanded. We believe the stock is unlikely to see significant upside after the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard, “What Factors Drove 32% Change in FedEx Stock between 2017 and now?“, has the underlying numbers.

FedEx’s P/E multiple remained at around 10x in 2018 and 2019 based on trailing earnings. While the company’s P/E is now at 22x given the recent rally, there is a downside when the current P/E is compared to levels seen in the past years, P/E of 10x at the end of 2018 and 2019.

So what’s the likely trigger and can the stock stick to recent gains?

The global spread of coronavirus has led to several restrictions in various cities across the globe, which has affected industrial and economic activity. However, the e-commerce activity has gained traction, as people prefer to stay at home and order goods online. This has aided FedEx’s Ground freight volume over the recent months. In fact, the company reported a 20% jump in Ground segment revenues in Q4 fiscal 2020, offsetting most of the decline from other segments. While this trend is expected to continue in the near term, we believe FedEx appears to be trading at a high multiple. We estimate 2021 EPS to be around $10.50, and at the current price of $208 a share, FDX is trading at 20x its forward earnings. This compares with trailing P/E multiples of 10x in 2018 as well as in 2019. We thus believe FedEx to be fully valued at the current levels.

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, valuations become important in finding value. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again. As such, the recent gains in the stock may stick, but any significant upside from the current price is unlikely in our view.

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