I have to keep reminding myself of the old Buffett aphorism of be greedy when others are fearful and fearful when others are greedy. FedEx pooped the bed yesterday and the CEO announced a bad case of diarrhea. First quarter earnings of $3.44 were preliminarily announced yesterday, with with second quarter earnings expected to fall in the $2.75 range (less than half the VL estimate). Predicting how fall out for the rest of the year is just a WAG at this point, which the CEO pretty much admitted when pulling guidance. Trying to value FedEx in this environment is not easy, but what the hell.
The first place I start when trying to get a handle on the value of a steady earner like FDX is to look at the low PE ratio based on TTM earnings over the past ten years. For FDX I took it back to 2008. The current PE of just under 8 is the lowest I’ve seen over 15 years. The second thing I look at is PE based on normalized earnings. Clearly the last few years have been generous, but the average EPS over the last 5 and 10 years are $15.82 and $12.41 respectively (I used VL to calculate the average EPS). At $160/sh FDX is trading at 10 and 13 times normalized earnings. Both of these numbers are below its median PE of 15 and the VL average annual expected PE of 14. In other words, discounting earnings to the average over the last decade still puts you in the reasonably priced range.
Thirdly, if the price simply recovers to the $300-$320 range it peaked at in 2020-2021 in the next decade the worst you could do is 6.5-7.0% return, plus dividends, a year. At $15.80/sh in earnings all FDX would have to do is see Mr. Market slap a PE of 19 on it in a moment giddy enthusiasm.
It seems to me that FedEx is currently bargain priced because the CEO decided to sound the alarm bells for the global economy.
“It seems to me that FedEx is currently bargain priced because the CEO decided to sound the alarm bells for the global economy.”
Or because FedEx’s margin has become Amazon’s opportunity. Or perhaps more likely some combination of the two. Agree that if this is more a function of global malaise and a major operating cost forecast “oops” there is significant upside. I just don’t know how to factor in the risk that an additional major competitor may be entering the fray, and with much less care for making money any time soon. Will be watching UPS closely to see if they follow suit…
Or because FedEx’s margin has become Amazon’s opportunity.
I guess that is a thing to remember.
What would the investment prospects of Foxconn/Hon Hai be without Apple as a client?
Another angle:
Among other things, Fedex is one of the world’s busiest airlines. And (relative to UPS) more long haul.
Fuel is a lot more expensive than it was, and may be that way for a long time.
I took a very quick look at some stats for FedEx vs UPS.
Since 2010, both have approximately tripled their revenues.
Both are at similar trailing P/E ratios: UPS 14.19; FedEx 14.92
UPS has a P/S of 1.55
FedEx has a P/S of 0.61
UPS P/S is high compared to an (eyeballed) average of around 1.2 since 2010, with the lower values being about 1.0 and higher values, since 2020 being up to 1.9
FedEx P/S is low compared to historical averages, which are approximately 0.8, with higher values being approximately 1.0 and the currently low only being seen in early 2020.
The difference in long-run average P/S ratios is explained by the difference in typical operating margins. FWIW, FedEx operating margin is approximately 6.7% and stable, which is about the average value since 2010.
UPS operating margin is approximately 13.5% which is historically as high as it has been, and is on an upward trend. Long run average would be in the 10-11% range.
So we’ve got UPS where there seems substantial current optimism about the future, and FedEx where there’s relative pessimism. I appreciate that they’re serving slightly different needs and that’s reflected in the operating margins, but are they really all that different, and have substantially divergent futures, to justify the difference in sentiment? Am I missing something?
Management credibility and competence. The TNT integration has been a disaster casting a big shadow with constantly changing timeline and cost estimate. It has already cost a couple of senior managers their jobs.
And now the hits to margins from supply chain disruptions and looming global recession. While these also affect UPS, the market believes UPS management is more capable of navigating it. In an oligopoly, if one of the players stumbles badly, it helps the others strengthen their moat even more.