Preamble
Any superior investor is ever connected nan hunt for awesome companies to own. However, uncovering these awesome companies whitethorn not beryllium easy. Even harder is to bargain them astatine adjacent prices, aliases amended still, astatine prices overmuch little than their intrinsic value; nan classical "paying 50 cents for a dollar" investment. This is erstwhile nan finance offers nan separator of information worth investors ever look for.
Intuitively, investors cognize that awesome companies waste and acquisition astatine a premium. Conversely, little awesome companies waste and acquisition astatine little multiples to bespeak nan higher risks and little value associated pinch them.
Occasionally, location are times erstwhile awesome companies are sold connected nan cheap, and these times are usually associated pinch negativity. It could beryllium immoderate adverse news, for illustration a people action suit successful nan lawsuit of 3M (MMM). It could beryllium really Amazon's (AMZN) stock value fell 8% aft reporting anemic earnings. Share prices could autumn owed to threats from nan title for illustration Alphabet (GOOGL) (GOOG) reacting to Microsoft's (MSFT) finance successful Chat GPT.
Or it could beryllium a operation of each these. If an investor were to ain shares successful immoderate of nan 3 companies mentioned above, what would that investor's consequence beryllium to nan autumn successful their portfolio worth erstwhile they spot nan banal prices of their holdings diminution precipitously? Would nan investor bargain much shares, clasp disconnected much buying until nan business clarifies, aliases waste everything to trim losses?
In this article, I shall analyse FedEx Corporation (NYSE:FDX), a awesome institution that has fallen upon difficult times. It was hammered successful 2022 amidst a challenging economical environment. The institution missed net estimates for 3 consecutive quarters from Q3 FY 2022 to Q1 FY 2023 and missed gross forecasts for different 3 consecutive quarters from Q4 FY 2022 to Q2 FY 2023. The banal value had already been declining since nan commencement of 2022. Talking heads were circling for illustration vultures, blaming nan CEO and his squad for mediocre execution. The last nail successful nan coffin came connected 15 September 2022 erstwhile nan institution reported Q1 FY 2023 net that missed nan statement forecast by 41.9% year-on-year. As a result, its banal value fell 21% that time arsenic disappointed investors abandoned FDX successful droves, bringing nan full diminution to 45% from January 2022 to September 2022, a diminution that was almost twice that of S&P 500 (SPY) and 18% much than Invesco QQQ ETF (QQQ) successful nan aforesaid period.
Had investors "zigged erstwhile everyone other zagged" and invested successful September 2022 alternatively of dumping FDX's shares, they would person benefited from FDX's banal price rebounding 44.6% from 30 September 2022 till 3 February 2023, a recovery 3 times nan 15.4% bounce successful nan SPY and almost 4 times nan 12.05% rebound successful nan QQQ successful nan aforesaid period.
In this article, I shall effort to place traits that tin thief investors admit nan adjacent FDX truthful they tin do nan correct point erstwhile nan opportunity comes knocking, which does not travel very often for awesome companies.
Also, I request to suffice my stance earlier I proceed. I americium not advocating a buy-and-hold-no-matter-what strategy. Nor americium I recommending a "let's bargain each nan 52-week-low stocks because they will each rebound". Instead, I americium looking for high-quality businesses that I person assurance successful and judge tin and will recover, aliases arsenic often stated “revert to nan mean.”
Before immoderate investor invests, capable owed diligence has to beryllium done because fundamentals matter and they matter a lot. In fact, more owed diligence is required of Contrarian Investors because they request much condemnation to put successful apparently underperforming companies and enactment invested done periods of falling knives.
In this article, I shall analyse FDX fundamentals done nan lens of:
Business worth proposition.
Long-term business viability.
Balance expanse and rate flow.
All my readers nary uncertainty cognize nan value of fundamentals but it does not wounded to punctual ourselves astir it.
Fundamentals matter because nary investors want to beryllium bag-holding for a decade and still suffer money. I did that pinch Lloyds (LYG) having held it from 2009 till 2020. I yet sold it astatine a 25% nonaccomplishment moreover aft collecting a decade of dividends.
Fundamentals matter because nary investors want to sell their investments astatine nan incorrect time. I almost sold my Exxon Mobil (XOM) shares successful 2020 because I saw my banal worth autumn 66% from $90 per stock to $30 per share; instead, I doubled down, kept buying until I was retired of cash, and brought my costs ground down to $54 per share.
Before we dive into nan article, keeping this quote from Charlie Munger of Berkshire Hathaway (BRK.A) (BRK.B) astatine nan backmost of our minds will service america well:
If you are not consenting to respond pinch equanimity to a marketplace value diminution of 50% 2 aliases 3 times a century, you're not fresh beryllium a communal shareholder and you merit nan mediocre consequence you're going to get.
With that, let's get to work.
What is FedEx's Business Value Proposition?
In different words, does FDX person a moat?
In FedEx's investor time position successful June 2022, CEO Raj Subramaniam shared:
FedEx Express is nan largest definitive proscription institution successful nan world, pinch 15 hubs, our Express world web connects much than 99% of world GDP.
And connecting each of these hubs is an awesome fleet of 714 planes, 4700 long-haul tractors, and 77000 different vehicles. That standard successful itself is simply a moat that is difficult to replicate. For instance, FDX has 2.5 times much planes than United Parcel Service (UPS) and 8 times much planes than Amazon Prime Air. More connected this later.
Of course, this level of connectivity pinch nan world system is simply a double-edged sword, meaning FDX's fortunes will emergence and ebb with nan world economy. As an FDX investor (or personification considering buying nan shares), it is basal to person this knowing erstwhile evaluating FDX's maturation targets for nan future.
During June 2022 Investor Day, nan CEO group immoderate bold targets for 2025.
And since nan time CEO made that projection successful June 2022, he was bullied for getting a small up of himself. He was blamed for being excessively optimistic. With nan 2nd half of 2022 down america successful our caller memory, and pinch nan knowledge that China had afloat reopened successful December 2022, we now person nan astir caller maturation forecast for nan world system by nan International Monetary Fund ('IMF') which is +2.9% successful 2023. That fig is only half of nan precocious extremity of FDX's projected gross CAGR but it is nevertheless a affirmative motion to spot immoderate cautious optimism from economists.
FDX's CEO was capable to beryllium optimistic apt because he knew nan expected complaint of maturation for e-commerce is acold greater than nan expected complaint of maturation of nan world economy, and that is nan cardinal that will powerfulness FDX's maturation for nan adjacent fewer years. Despite a return to normality aft nan first pandemic fears, pinch nan euphoria astir "the caller normal of e-commerce" having subsided and subdued somewhat successful 2022 erstwhile compared to 2020 and 2021, nan e-commerce scenery has inevitably ramped up to a caller and higher baseline and is expected to turn astatine comfortable rates that outpace nan maturation of nan world economy. When we analyse analysts' 2023 gross forecasts for immoderate of nan starring e-commerce companies for illustration Amazon, Alibaba (BABA), JD (JD), MercadoLibre (MELI) and Etsy (ETSY), we tin spot a batch of positivity pinch these e-commerce companies expected to turn gross astatine slightest much than 3 times nan complaint of nan world economy.
CEO Raj Subramaniam believes 90% of FDX's early gross maturation will travel from e-commerce and hence FDX has been investing successful its captious web infrastructure to position itself to use from nan tailwind of a multi-year maturation successful e-commerce. In nan June 2022 Investor Day position speech, FedEx laminitis Fred Smith shares that:
Networks return clip and are difficult to build. Expenses are front-loaded. A web does not beryllium until it reaches minimal scale. Scale matters successful competitory networks. Just inquire T-Mobile and Sprint earlier they merged really it was competing pinch AT&T and Verizon. Networks serving galore distant addresses require hubs aliases switches to link each points pinch each different points. Max standard FedEx halfway networks are astir intolerable to copy pinch important net upside fixed 2016-2021 investments and acceleration of volumes and yields during nan pandemic.
It is not difficult to spot nan standard of FDX's web giving it a competitory moat, and really it is deserving of being known arsenic nan largest definitive proscription institution successful nan world, tin of picking up a shipment successful immoderate 1 portion of nan world and getting it to immoderate different portion of nan world successful nan adjacent mates days.
Other than FedEx Express, nan FedEx Ground section has been increasing steadily too. Over nan last respective years, nan Ground marketplace has outpaced nan Express market, increasing astatine astir 8.5% CAGR while nan Express grew astatine astir 0.5% CAGR. For comparison, nan Ground marketplace represented astir 70% of nan United States marketplace 10 years ago. Today, it has astir 90% of nan marketplace share.
What is FedEx's semipermanent business viability?
Despite a much muted 2.9% world maturation projection from nan IMF, FDX is still a patient and viable business. Each of its 3 main business segments is still bringing successful billions of dollars successful revenues.
Below is simply a little overview of what each business conception does:
FedEx Express provides rapid, reliable, time-definite transportation to much than 220 countries and territories, connecting markets that comprise much than 99 percent of nan world’s gross home product, utilizing its aerial way authorities and proscription infrastructure, and accusation technologies.
FedEx Ground provides low-cost, day-certain work to immoderate business reside successful nan U.S. and Canada, arsenic good arsenic residential transportation to 100% of U.S. residences done its FedEx Home Delivery® Service. FedEx Ground Economy, a FedEx Ground service, specializes successful nan consolidation and transportation of precocious volumes of low-weight, little time-sensitive business-to-consumer packages.
FedEx Freight provides less-than-truckload ('LTL') freight services crossed each lengths of haul to businesses and residences successful North America. Within nan U.S., nan institution offers 3 services: FedEx Freight Priority for speedy delivery, FedEx Freight Economy for cheaper delivery, and FedEx Freight Direct to meet nan needs of nan increasing e-commerce marketplace for transportation of heavy, bulky products to aliases done nan doorway for residences and businesses.
A anemic macro outlook successful 2022 brought connected by a rising liking complaint environment, a warfare successful Ukraine, and rising costs of everything had been weighing down investors' sentiments. Naturally, investors were spooked erstwhile nan CEO shared successful nan Q2 2023 earnings call successful December 2022 that,
Volumes declined crossed each segments, chiefly astatine Express down debased double digits. As such, gross was down 3%, driven by a diminution astatine FedEx Express, which was partially offset by maturation astatine FedEx Freight and FedEx Ground.
Remember that I said that FDX's luck is tied to nan world economy? The system moves successful cycles and it will yet recover. Brie Carere, Executive Vice President and Chief Customer Officer, shared that metallic lining successful nan aforesaid convention call, projecting measurement betterment by nan backmost half of FY 2023,
... we stay prudent successful our expectations for measurement and output successful nan 2nd half of nan fiscal year. That being said, our work worth proposition comparative to our title will stay strong. And successful fact, our comparative marketplace position will amended successful nan backmost half of nan year.
Management appears assured that pinch nan amended comps expected successful Q4 that will beryllium lapping nan effect of nan opening of nan warfare successful Ukraine, FDX's year-over-year measurement comps will amended done nan backmost half of nan fiscal twelvemonth 2023.
In addition, contempt softer volumes, net should clasp up done a operation of nan measures taken to trim costs (such arsenic nan precocious announced 10% layoff of elder and director-level jobs), amended efficiencies, trim CAPEX, and structural betterment successful gross done costs betterment substance surcharges successful April 2022 to offset nan rising costs of substance successful 2022, and a 6.9% wide complaint summation successful September 2022, positive highest surcharges successful December 2022.
It is basal to item that FDX's business exemplary allows it to
(1) walk nan costs of rising substance to their customer,
(2) raise rates annually, and
(3) enforce surcharges during highest periods.
The expertise of FDX to support rising rates moreover successful nan look of little measurement is an understated spot of its business model. That expertise enables FDX to support aliases moreover turn net done periods of weaker demand. And erstwhile nan world economical betterment is successful afloat swing, these complaint increases will supercharge earnings.
The astir important logic regarding FDX's semipermanent business viability lies successful nan measurement nan institution has embraced nan mission-critical quality of its business done its investments successful its web infrastructure to amended service a world wherever e-commerce is an integral portion and 1 wherever consumers person gotten utilized to instant gratification and same-day aliases next-day delivery.
If you deliberation FDX is conscionable made up of transportation drivers, their vehicles, and their beingness hubs, you will beryllium sorely mistaken. FDX realizes it has a immense wealth trove of information that tin beryllium leveraged to amended operational efficiencies, trim cost, amended margins, and supply greater visibility successful position of transportation dates for its customers. FDX's very ain AI exemplary Dataworks has made nan accuracy of transportation times amended by reducing changes by 40%. The company's extremity is to get each FedEx Ground deliveries successful nan United States to a 4-hour window, to get Express to a 2-hour window, and past to quickly amended by expanding this capacity to 13 countries. By utilizing nan information it has, FDX is capable to amended merge nan strengths of its 3 abstracted divisions - Express, Ground, and Freight - to trim redundancy and supply amended work astatine little costs.
Lance D. Moll, CEO of FedEx Freight explains,
...working pinch Dataworks and Ground, nan engineering squad complete astatine Ground arsenic good arsenic nan engineers astatine Freight, we've identified immoderate complementary activities to trim drayage costs betwixt some operating companies. So, each of nan intermodal activity... astatine Ground and... astatine Freight, antecedently was being looked astatine separately. Ground took attraction of their intermodal trailers, Freight took attraction of theirs. But nan Dataworks squad created a dashboard which gave nan Freight squad who really needs to negociate nan intermodal business for some companies, visibility to each of nan intermodal containers pinch Ground, Freight, and pinch Freight connected them. So then, erstwhile our drivers were there, alternatively of driving backmost conscionable a tractor, a bobtail mile, which is conscionable a tractor by itself without a trailer attached to it, we had visibility to where, okay, alternatively of going backmost to Freight, nan Freight hub pinch conscionable a tractor, there's a Ground trailer complete there. We'll prime it up and bring it backmost past to John's (CEO FedEx Ground) station... nan savings connected reducing those quiet bobtail miles... is astir 8 cardinal miles.
Placing each nan supra successful nan wider backdrop of a very patient and fast-growing e-commerce industry, it is easy to consciousness assured successful nan business viability of this institution knowing that FDX has a moat that is not easy surpassed.
What is FedEx's equilibrium expanse and rate travel situation?
FDX is simply a BBB-rated company, which according to nan standing agency is still mostly classed arsenic being finance people which intends companies shouldn't person excessively overmuch problem attracting investors aliases lenders.
Its operating rate travel has been strong, particularly successful FY 2021 and 2022.
Sales maturation successful these 2 years was awesome too, bolstered by nan maturation successful e-commerce.
2021 and 2022 were very affirmative years for FDX. Those were nan e-commerce roar during nan first 2 years of nan pandemic, coupled pinch labour shortages and supply-chain issues reducing inventory levels and creating a request crunch, each converging to thrust growth.
FY 2023 reflects a vastly different business pinch proviso concatenation issues easing, and nan world returning to normality, hence transportation measurement fell and nan reliable comps versus nan 2 awesome years were intolerable to lucifer up.
At nan extremity of nan day, it is worthy noting that FDX is simply a business that successful FY 2022 brought successful a nett operating rate travel of $9.8 billion, had $6.9 cardinal successful rate and rate equivalents (Note: It has $4.6 billion of rate and rate balanced arsenic of 30 November 2022), and $20.4 cardinal successful full assets.
Investors were concerned that FDX was spending excessively overmuch connected investments while revenues were connected nan diminution truthful erstwhile nan institution announced various cost-cutting actions to boost nan equilibrium sheet, investors cheered. Recently, nan announcement by FedEx to trim elder jobs arsenic portion of a larger unit reduction sparked a mini-rally successful nan banal value arsenic investors expressed alleviation astatine this further cost-cutting effort.
FDX has $19 cardinal successful full indebtedness (see page 92 of 2022 10K). If FDX has problem paying disconnected nan debts, it tin lead to a in installments standing downgrade aliases moreover insolvency.
However, nan scheduled main payments owed by each fiscal twelvemonth connected nan semipermanent indebtedness are very manageable astatine conscionable $52 cardinal a twelvemonth for nan adjacent 5 years. For a institution that generated $93 cardinal successful revenues successful FY 2022, I americium rather judge FDX tin salary disconnected its debts easily.
Also, astir of these loans are fixed rates specified arsenic nan U.S. dollar fixed-rate notes and nan Euro fixed-rate notes truthful a rising liking complaint situation does not person immoderate worldly impact. The weighted-average liking complaint connected nan semipermanent indebtedness was 3.5% arsenic of 31 May 2022.
What should investors do pinch FDX erstwhile it gets deed by a nasty trifecta of bad news, mediocre earnings, and moreover poorer sentiments?
We person covered nan fundamentals from nan position of:
Business worth proposition.
Long-term business viability.
Balance expanse and rate flow.
Now, let's reside nan matter of decision-making successful nan look of a tremendous magnitude of negativity that was surrounding nan company.
On 15 September 2022, FDX reported anemic net of $3.44 for Q1 2023, missing estimates by $1.70. When bad property (see article below), mediocre earnings, and moreover poorer sentiments deed FedEx, for illustration clockwork, nan banal met pinch a flurry of analysts' downgrades nan time after, pinch Stifel downgrading FDX banal by a whopping 32% moreover earlier nan net telephone which happened connected 22 September 2022. And wrong days of nan net telephone connected 22 September, much analysts issued downgrades pinch Morgan Stanley taking nan podium pinch a 50% trim successful their value target.
(Note: The article "FedEx Shares Sink After Company Cites Weakening Global Demand" from 15 September 2022 summarized nan circumstances surrounding nan company.)
Let's opportunity that I return a worst-case script and presume zero net maturation for nan remainder of FY 2023, $3.44 x 4 = $13.76, which is measurement little than nan $20 of net per stock analysts for illustration David Vernon pinch Bernstein were projecting anterior to that unspeakable net report. At nan 52-week debased of $141.92, FDX's shares were being priced astatine conscionable 10x earnings. Using Morgan Stanley's value target of $125 and Factset analysts' revised statement net estimate of $13.55 for FY 2023, FDX was conscionable priced astatine 9.2x earnings.
I get that analysts and investors were concerned. And CFO Mike Lenz was not helping to soothe their nerves astatine nan net telephone erstwhile he said,
For nan remainder of nan year, while we are not providing guidance, fixed existent uncertainties, our scheme is based connected an expectation that nan weak trends we saw successful precocious Q1 will persist crossed our awesome geographies.
Nobody likes it erstwhile a institution misses net by a mile. Nobody likes it erstwhile a institution stops providing guidance. Investors dislike uncertainties. Yet, it is during periods of uncertainty that mispricing happens. And FDX priced astatine 9.2x net conscionable does not sound right. And that is nan clip Contrarian Investors should return statement and strike.
Consider nan following: successful nan play from nan commencement of nan Great Financial Crisis (June 2007) to nan early months of Covid (May 2020), FDX traded astatine a normal P/E of 16.42. Take a infinitesimal to fto that descend in. Despite including these 2 market-shaking world events, 1 wherever livelihoods and financial information were shaken and millions mislaid their homes and savings, and nan different wherever billions of group were surviving connected tether hooks successful an unprecedented world shutdown, FDX traded astatine a normal P/E of 16.42.
Let maine further constrictive down nan study play to betwixt June 2017 and May 2020. FY 2019 was erstwhile FDX's banal was deed by a deceleration successful adjusted operating earnings. And 2020 included nan clang successful FDX's net owed to nan world lockdown. Despite each of these, FDX was trading astatine a normal PE of 13.93 successful that clip frame.
Yet successful September 2022, nan marketplace was pricing FDX astatine a P/E of 9x to 10x earnings.
The views of nan marketplace and master analysts backmost past successful September were measurement excessively pessimistic, successful my opinion.
Howard Marks of Oaktree Capital Management erstwhile said:
Everyone gets worried erstwhile prices decline, but nan flipside of value deterioration is an increase successful prospective returns.
We person often heard nan building "all nan bad news has been priced in". That surely applies to FDX's banal value 4 months ago. The highest of nan confluent of bad news that deed FDX happened successful September 2022, driving nan banal value down 20% successful 1 day, and really making an finance successful FDX safer then. And that little value offered investors an summation successful prospective returns erstwhile nan stock value reverts to nan mean.
And if nan Contrarian Investor had purchased shares of FDX erstwhile others were dumping it, moreover excluding nan mid-January 2023 runup successful plus prices, an finance successful FDX astatine its doldrums would person returned 27% successful a small complete 3 months, which intelligibly crushed nan SPY's 11.6% and QQQ's 5.1% successful nan aforesaid period.
Valuation
Is FDX still a bargain now? It is simply a clasp for maine arsenic I deliberation is afloat weighted now. At nan existent price, FDX is still a awesome institution but is not trading astatine a awesome price.
FDX traded astatine a PE of 16.76 betwixt 2009 and 2019. I chose this clip framework to see nan Great Financial Crisis erstwhile nan adjusted operating net were flat, and 3 different periods erstwhile net were either antagonistic aliases grew astatine azygous digits, and to exclude nan effects of nan pandemic roar years of FY 2021-2022.
SPGI analysts forecast 3-5 years EPS semipermanent maturation complaint of 8.88% which is adjacent to nan 7.77% net maturation complaint forecast by Factset analysts.
Knowing afloat good my ain fallibility, I for illustration to build successful a separator of safety, truthful I presume that FDX will waste and acquisition up to a PE of 15 (instead of its pre-covid normal of 16.76), and nan net will turn astatine a complaint of 7% per twelvemonth (instead of 7.77% aliases 8.88%).
Based connected those blimpish assumptions, I get a projected 7.24% full annualized complaint of return successful 3 years, which whitethorn beryllium alright for immoderate investors but not for me.
Conclusion
FDX is an investment-grade institution pinch beardown fundamentals and a mission-critical business model. It has invested billions to create a beingness web pinch an unparalleled standard that is difficult to replicate. Its investments into integer infrastructure are fresh to carnivore consequence to let it to amended margins and trim costs by leveraging spare capacity crossed its different business divisions for illustration FedEx Express and FedEx Ground. And pinch astir of nan investments already underway aliases over, nan past mean yearly CAPEX of $2.4 cardinal is expected to beryllium astatine aliases little than $1.5 cardinal from 2025, and little CAPEX intends higher free rate flow.
Its early gross maturation is supported by enduring semipermanent tailwinds of a fast-growing e-commerce world. The reopening of nan world, particularly China, portends good for an improving world economy. As successful each businesses, particularly cyclical ones that are tied intimately to nan economy, location will beryllium ups and downs, and erstwhile Mr. Market offers mispricing opportunities successful world-class companies, it is up to Contrarian Investors to return advantage.
Contrarian investing tin beryllium very lucrative. Identify awesome companies, hold for opportunities, and erstwhile they stumble and nan marketplace misprices them, put and hold for nan banal to recover. Contrarians zig erstwhile others zag.
Readers, I americium not downplaying nan economical realities of a challenging business situation aliases 1 wherever galore economists are expecting a recession successful a fewer months. I americium a realist who accepts that moreover nan champion institution successful nan business, particularly those intricately tied to nan world economy, will brushwood bad times. When its (temporary) autumn from grace is much reflective of outer circumstances alternatively than a defective business exemplary aliases mediocre management, it is clip to bargain more.
In a July 2022 interview pinch Fortune soon aft Raj Subramaniam became nan caller CEO of FedEx, he shared his strategy for nan company,
We person build a very beardown instauration complete nan past 50 years. Building networks is not easy astatine each and it takes a batch of clip and patience to build these networks. Now we are astatine a pivotal constituent wherever we tin build disconnected that instauration our networks and create worth for each of our stakeholders. The 2nd portion of nan communicative is that we person specified a beardown beingness web but it besides sewage a beardown underpinning of nan integer web and going guardant we are going to create worth not only from nan beingness facet but besides from nan integer facet of our network. We are present to create nan bequest of nan adjacent 25 years.
I judge that FDX is present to enactment for nan adjacent 25 years, and nan Contrarian Investor successful maine will ever support a lookout for times erstwhile it stumbles to adhd much shares.
This article was written by
I americium a blimpish yet opportunistic worth investor who person been investing since 2005. I americium fact-driven, preferring to let financial information pass maine of a company's health, followed by qualitative study to capable successful nan gaps to overgarment a holistic image of a company's prospects.I admit everyone who sounds my investigation and particularly those who driblet maine questions and comments, and travel maine successful Seeking Alpha. If you would for illustration to prosecute successful further discussions, you tin either connection maine straight successful Seeking Alpha, connected Twitter (https://twitter.com/jamessciteacher) aliases find maine connected Discord. I americium successful a discord group led by Motley Fool writer Mr. Eric Cuka.
Disclosure: I/we person a beneficial agelong position successful nan shares of FDX either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it. I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.
Editor: Naga