Despite A Solid 2x Rally, FedEx Stock Likely To See Even Higher Levels
The stock price of FedEx Inc.(NYSE: FDX) is now up over 2x from the levels it was on March 23, 2020, when broader markets made a bottom due to the spread of Covid-19. This marks a significant outperformance compared to the S&P which moved 68% since its March 2020 lows, with the resumption of economic activities as lockdowns are gradually lifted and vaccines are being approved in multiple countries. This outperformance can be attributed to strong growth in FedEx’s Ground services amid an increase in home delivery orders in the wake of the pandemic. FDX stock is also up 50% from levels of around $160 seen in early 2019.
Most of the 50% growth of the last 2 years can be attributed to an expansion of the company’s P/E multiple. Looking at the company’s fundamentals, its total revenue grew 6% from $65.5 billion in fiscal 2018 to $69.2 billion in fiscal 2020 (fiscal ends in May), primarily led by higher FedEx Ground revenues. FedEx’s Net Margins though have declined from 6.4% to 3.6% over the same period. This clubbed with a 4% decline in total shares outstanding due to share buybacks, meant that the company’s earnings declined 38% to $9.52 in 2020, compared to $15.33 in 2018, on a per share and adjusted basis. The margin decline in 2020 can be attributed to an increase in operating costs, including purchased transportation, primarily due to the pandemic. Despite the lackluster performance in 2020, we believe FDX stock is likely to see more upside in the near term. Our dashboard, ‘What Factors Drove 50% Change In FedEx Stock between 2018 and now?‘, has the underlying numbers.
FedEx’s P/E multiple expanded from 10x in 2018 and 2019 to 27x in 2020. While the company’s P/E is 25x now (based on trailing EPS), there is a potential upside given the expected growth in EPS over the coming years, as well as comparing the P/E multiple to that of its peers, as we discuss in the below section.
So what’s the likely trigger and timing for upside?
Despite the challenging current environment given the pandemic, FedEx has managed to grow its revenues as well as margins, led by an increase in home delivery orders. As we look into fiscal 2021, FedEx has seen a strong revenue growth of 16% in the first two quarters, led by higher demand for the FedEx Ground segment. The company has also managed to grow its Net Margins (Non-GAAP) by a strong 55% to 6.5% for the six month period ending November 2020. A solid revenue growth clubbed with margin expansion has meant that FedEx’s Adjusted EPS grew 74% over the same period.
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Looking at valuation, one may argue that the P/E multiple of 25x is expensive compared to levels of 10x seen over the recent years. However, we know that fiscal 2020 earnings were impacted due to the pandemic. But, as we look forward, at the current price of $243, FDX stock is trading at just 14x its estimated fiscal 2021 EPS of around $17.50. Now, the 14x figure for FedEx compares with 20x for its peer United Parcel Service UPS based on its current stock price of $158, and estimated EPS of $7.69 for 2020, implying FDX stock trades at a much cheaper valuation and it can continue to trend higher in the near term.
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