Yahoo Finance FedEx: Buy It Blindly?
- By Mark Yu
FedEx (FDX) shares fell 3.3% last week a day after the company reported its second quarter fiscal 2017. Despite this fall, financial services firm Cowen Group stated, "We would use any share weakness as a buying opportunity."
Warning! GuruFocus has detected 5 Warning Signs with FDX. Click here to check it out.
The intrinsic value of FDX
For the first two quarters of its fiscal 2017, the $51.1 billion integrated shipping and logistics company delivered 19.7% sales growth to $29.6 billion and 2.3% profit growth to $1.4 billion.
As observed, FedEx had an additional $3.7 billion in sales that came from TNT Express (TNTE), which the former acquired for 4.4 billion euros ($4.59 billion), FedEx's largest acquisition in its history, in May.
Without TNT, FedEx would have still delivered a 4.7% top-line growth compared to a five-year average of 5.29%. In addition, FedEx sees its diluted earnings-per-share (EPS) figure for fiscal 2017 between $10.95 and $11.45, a 72% growth at midpoint EPS basis. FedEx had a five-year average of 4.62%.
"FedEx increased revenues and operating income despite continued low growth rates in the global economy. We are in the home stretch of our peak shipping season, and our service levels are high, thanks to the outstanding efforts of our hundreds of thousands of team members around the world. The integration of TNT Express into our broad portfolio of global business solutions is proceeding smoothly and according to plan." - Frederick W. Smith, FedEx Corp. chairman, president and CEO
Valuations
According to GuruFocus data, FedEx had a trailing price-earnings (P/E) ratio of 27 times (industry median 16), price-book (P/B) ratio of 3.5 times (industry median 1.18) and price-sales (P/S) ratio of 0.95 times (industry median 0.98). The company also had a trailing dividend yield of 0.75% with a 17% payout ratio and a 5.7% share buyback ratio.
(Annual Report)
Market performance
FedEx outperformed the broader Standard & Poor's 500 index year to date with an outstanding 29.8% vs. 13.18% (1). In a five-year time frame, the logistics company returned a total of 18.2% vs. the index's 14.8%.
(Annual Report)
FedEx
FedEx was founded in 1971 by Frederick Wallace Smith who still serves as the company's chairman, president and CEO. The CEO owns about 5.77%, or 15.4 million FedEx shares or $2.95 billion worth at the time of this writing.
In fiscal 2016, FedEx derived 75.6%, or $38 billion, of its total sales from the U.S. Through acquisitions and business development, FedEx formed these business segments: FedEx Express carries FedEx Express and TNT Express, FedEx Ground, FedEx Freight and FedEx Services.
(FedEx Stat Book and 10-K)
FedEx Express Group (FedEx Express and TNT Express)
FedEx Express
FedEx Express is the world's largest express transportation company, offering time-definite delivery to more than 220 countries and territories. The company has several business purposes including, FedEx Express (express transportation), FedEx Trade Networks (air and ocean freight forwarding, customs brokerage and cross-border enablement technology and solutions) and FedEx Supply Chain Systems (logistics services).
The FedEx Express segment contributed 53%, or $26.5 billion, in total sales in fiscal 2016 compared to $27.2 billion in 2015. The segment also had an operating margin of 9.5% for the period.
In its first half fiscal 2017, the segment grew 1.7% to $13.3 billion compared to the same period last fiscal year.
TNT Express
FedEx described TNT Express as an international express transportation, small-package ground delivery and freight transportation company. TNT Express' majority business involves shipments between businesses and also offers business-to-consumer services. The company also offers road transportation networks.
According to FedEx, TNT Express made 6.9 billion euros in sales in 2015. In its recent two quarters, TNT segment contributed about 12.5%, or $3.7 billion, to overall FedEx sales while having an operating margin of 1.5%.
FedEx Ground
FedEx Ground is a leading North American provider of small-package ground delivery services. The company provides low-cost, day-certain service to any business address in the U.S. and Canada as well as residential deliveries. FedEx Ground also includes GENCO, a third-party logistics provider.
FedEx Ground contributed 33%, or $16.6 billion, in total sales last fiscal year, compared to $12.98 billion the year prior. The significant increase in sales (27.6%) was partial because of FedEx's acquisition of GENCO in January 2015. GENCO contributed $1.5 billion in sales in the period. Without GENCO, the FedEx Ground segment still recorded a strong 15.9% growth in overall sales. FedEx Ground had an operating margin of 13.7% in fiscal 2016.
Two quarters into its fiscal 2017, FedEx Ground grew 10.5% year on year and delivered a 12.3% operating margin.
FedEx Freight
FedEx Freight is a leading U.S. provider of less-than-truckload freight services across all lengths of haul. The company offers FedEx Freight Priority and FedEx Freight Economy (2). The segment also operates FedEx Custom Critical for time-critical transportation.
FedEx Freight contributed 12%, or $6.2 billion, in total FedEx sales in fiscal 2016, compared to $6.19 billion in its previous year. The segment provided an operating margin of 6.9%. For the first half 2017, the segment grew 3.4% year on year and had a similar 6.9% margin.
FedEx Services
FedEx Corporate Services provides sales, marketing, information technology, communications and back-office functions that support our other companies. The segment also carries the FedEx Office, which is involved in its document and business services and package acceptance.
FedEx services contributed 3%, or $1.59 billion, in fiscal 2016, but had no figures representing for operating income. As observed, the segment grew 2% to $809 million in its recent two quarters.
Overall, FedEx's sales and profit growth figures in the past five years were 5.08% and 4.62% (1). FedEx had a five-year operating margin average of 7.18%.
Cash, debt and book value
As of November, FedEx had $3 billion in cash and $13.6 billion in debt with a 0.93 debt-equity ratio, compared to 0.57 year on year (1). The company also had 14.9% of its $46.3 billion assets in goodwill for the period while having a book value of $14.5 billion compared to $14.99 billion year on year.
Cash flow
For FedEx's recent two quarters, the company delivered a 7.4% cash flow from operations growth to $2.6 billion, compared to the same period last fiscal year (2). Observable positive cash flow came from the company's profits, depreciation and amortization and deferred income taxes. Deferred income taxes, in particular, rose to $320 million from $48 million outflow year on year.
Capital expenditures were $2.68 billion, leaving FedEx with a negative $46 million free cash flow compared to negative $108 million year on year.
FedEx allocated $547 million in dividends and share repurchases for the period despite having a negative free cash flow. Over the past three years, FedEx allocated 391% of its free cash flow for dividends and share buybacks.
Also, FedEx did not take any debt but reduced it by $43 million during the recent two quarters.
Conclusion
The 45-year-old shipping and logistics company has a lot going on to propel its business moving forward. The company's smart acquisitions in recent years helped log admirable growth figures, too. Nonetheless, FedEx has taken more debt in recent years brought by these strategic acquisitions. Debt found in its balance sheet would probably not be appealing for a conservative investor.
Meanwhile, due to the large insider ownership, FedEx could probably be relied upon to keep this heavy amount of shareholder payouts moving forward unless insiders would sacrifice these payouts to keep the company afloat during hard times. In addition, FedEx is continually growing its business. This ongoing payout expectation could also be met without requiring further debt issuance as long as the recent acquisitions, especially the TNT Express acquisition, deliver an increase in profit and cash flow figures.
During its earnings release, FedEx claimed that it is on track to meet its goals for fiscal 2017, which is good news for all FedEx bulls.
(Google Finance)
In mid-December, analysts in Cowen see FedEx as an outperform with a $240 a share target price, while JPMorgan ranked FedEx shares as an overweight with a $233 per share target price.
Using the company's EPS forecast for fiscal 2017 and applying its five-year historical earnings multiple average and a 20% margin indicated a value of $196 a share. Coming off all-time highs this month, investors should still be cautious.
In summary, FedEx is a speculative buy with at least a $210 per share price target.
Notes
(1) Morningstar data.
(2) Wikipedia: Less than truckload shipping or less than load (LTL) is the transportation of relatively small freight.
Disclosure: I do not have shares in FedEx.
Start a free seven-day trial of Premium Membership to GuruFocus.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 5 Warning Signs with FDX. Click here to check it out.
The intrinsic value of FDX
