COVID-19-related growth in e-commerce provided an indirect boost for FedEx (FDX). With earnings sharply higher year-over-year, the package delivery giant’s shares rallied 188% between March 2020 and March 2021.
But as focus now shifts away from last year’s top performing sectors, does this stock have room to move higher or will it continue to trade sideways as investors price-in last year’s results as a one-time event?
While the second outcome is a possibility, there’s a case to be made for the stock moving higher. Earnings growth in the coming year is going to be relatively modest (high single-digits), but with the stock trading at a discount to peers, there may be reasons to justify a higher valuation.
More Modest Growth Ahead For FedEx
FedEx’s strong earnings growth was the primary factor behind its rally from $111 per share to $271 per share over the course of a year.
For FY20 (ending May 2020), FedEx posted $9.50 per share in earnings. Additionally, analysts estimate earnings for the current fiscal year (ending May 2021) will land around $17.45 per share.
With much of last year’s growth the result of a one-time event, future levels of growth are going to pale in comparison. However, that’s not to say earnings are going to fall back to pre-pandemic levels.
As the economy reopens, e-commerce remains strong and FedEx could see modest earnings gains over the next fiscal year (ending May 2022). Consensus earnings estimates are for approximately 8.3% year-on-year growth to $18.90.
Considering its current valuation, there’s plenty to justify higher prices for FDX over the next twelve months.
Reasonable Valuation, But Don’t Forget One Long-Term Concern
Trading at 15.5x forward earnings, FedEx stock is reasonably priced. Rivals like United Parcel Service (UPS) and XPO Logistics (XPO) sport slightly higher forward multiples. This supports the case that FDX might be undervalued at current levels, but it’s important to remember that there’s a long-term risk factor that may continue to weigh down shares.
Amazon (AMZN) is developing its own logistics and shipping infrastructure that could slowly muscle FedEx out of its own business. While this is a potential concern for companies like FedEx and its historic rival, UPS, it shouldn’t hinder FDX’s ability to catch up with UPS in terms of valuation.
In short, FDX is currently trading at a discount to its peers and based on valuation alone, there might be enough to justify the stock trading at higher price levels.
What Analysts Are Saying About FDX
According to TipRanks, consensus among analysts is a Moderate Buy. Based on 18 analyst ratings, 13 recommend a Buy, 4 suggests a Hold, and 1 advises a Sell.
The average analyst price target on FDX is $323.40, which implies 24% upside potential from current levels. Price targets range from a high of $356 per share to a low of $250 per share. (See FedEx stock analysis on TipRanks)
Bottom Line: Additional (Yet Gradual) Gains May Be On The Horizon For FDX
After its strong run in 2020, FDX has taken a breather in recent months and while upcoming fiscal results may not be as impressive as last year’s, they may be sufficient to justify a higher share price.
Future growth may be more gradual, but as earnings grow and the current valuation gap versus its peers narrows, FDX could generate solid returns over the next year.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
