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FedEx: Will Short Term Headwinds Defy Long Term Potential?
Stock Analysis & Ideas

FedEx: Will Short Term Headwinds Defy Long Term Potential?

FedEx Corporation (NYSE: FDX) is by far one of the largest and most popular names in the global logistics industry. The company has successfully navigated the troughs of the pandemic and is poised for positive performance in the upcoming quarters.

However, current headwinds, such as labor-related cost challenges, delivery limitations, and shrunken demand for its services coupled with stiff competition from United Parcel Service, Inc. (UPS) have all faltered FedEx’s performance in 2021 and to date.

In its third-quarter results for the period ending February 28, 2022, the company yet again missed adjusted earnings expectations by 5 cents. On the brighter side, however, FDX’s revenue advanced 9.8% year-over-year to $23.6 billion and also outperformed revenue estimates.

Following the third-quarter earnings miss, FedEx’s stock fell almost 4% on Friday, March 18. Year-to-date, its stock is down a little more than 15%.

Analysts on the Street, too, gave mixed signals post-FedEx’s results, with few maintaining their price targets while others lowering them. Wells Fargo analyst Allison Poliniak also lowered the price target on the FDX stock to $277 (26.5% upside potential) from $314, but maintained a Buy rating.  

The price target of $277 is based on a 12times forward Price/Earnings (P/E) multiple of FY23 estimated earnings.

Let us take a closer look at the company’s financial performance and future outlook.

Q3FY22 Results in Detail

FedEx operates through four primary segments, each harboring its own set of unique strengths and weaknesses.

The FedEx Express segment, which caters to air cargo transportation, witnessed higher yields and benefits from favorable fuel pricing. However, these were offset by the Omicron variant surge in the quarter, which led to air capacity limitations. Moreover, the segment is also undergoing integration with TNT Express and continues to incur costs related to it, affecting its bottom line. FedEx Express contributed around 48% towards total revenue and has grown 4.8% year-over-year.

Management noted that the Express segment incurred a $240 million hit to profit from the Omicron variant due owing to pilot absences and flight cancelations. However, analyst Poliniak is optimistic about the segment’s long-term growth potential and believes that “upper single-digit margins remain achievable.”

Next in, the FedEx Ground segment caters mainly to the North American region for small package home deliveries and business-to-consumer deliveries. This segment was also affected due to increased wages and network inefficiencies coupled with constraints from the Omicron variant and higher transportation costs. However, the quarter’s revenue per package jumped almost 9% year-over-year to $10.62, which offset the negative elements. The segment contributed around 37% towards total revenue and has grown over 10% compared to the same period last year.

Although analyst Poliniak has lowered margin estimates for FY22 to 8.2% from 10%, she does believe “such cost issues have likely peaked, there will be a walk back to this normalized level.” According to the analyst, Ground segment margins could surpass the mid-teen range over the long term.

The FedEx Freight segment is one of the largest nationwide less-than-truckload carriers, and it is also extending services in international markets through meaningful partnerships. The segment contributed around 9.5% towards total revenue and has increased almost 23% over the year-ago period. Notably, the segment’s operating income nearly tripled in the quarter, backed by an increase in revenue per shipment of 19% and growth in average daily shipments of 2%.

Finally, the FedEx Services segment, which handles all the marketing and documentation services, is a minuscule portion of its operations.

The silver lining to the mixed results was that the company maintained its adjusted earnings outlook for full-year fiscal 2022, which falls in the range of $20.50 per share to $21.50 per share.

In tandem with FedEx’s Q3 results and economic uncertainty, analyst Poliniak lowered the adjusted earnings forecasts for FY22E/FY23 to $22.60/$23.10 per share.

The management is overly optimistic and focused on expanding its Ground segment. Over the past couple of years, the company has invested heavily in the segment to grow its market share and expects to start reaping the benefits in the form of “improved operating profit and margins.”

Overall, the company noted three more levers for profitable growth, namely, driving improved results in Europe; increasing collaboration and efficiency to optimize networks; lowering costs to serve and enhance return on capital; and unlocking new value through digital innovation. To attain the levers, the company continues to find ways to “put the right package in the right network and at the right price”

Concluding Views

Wall Street analysts have awarded the FDX stock a Strong Buy consensus rating based on 16 Buys and three Holds. The average FedEx price target of $293.72 implies 34.2% upside potential to current levels, at the time of writing. However, the stock has lost 19.2% over the past year and trades at a discount of almost 32% from its yearly high of $319.90.

Other TipRanks metrics also showcase positive reinforcement for FedEx stock. TipRanks stock Investors are Very Positive on FDX with 1.3% of investors increasing their exposure over the last three months. Similarly, hedge fund investors have increased their holdings by 3.4 million shares in the last quarter. Likewise, financial bloggers are 90% bullish on the FDX stock compared to a sector average of 70%.

Turning to its valuation, FedEx currently trades at a P/E (non-GAAP) multiple of 11.64x, which is well below its industry average of 19.94x and its five-year average of 15.10x. Moreover, the targeted stock price still shows a compelling upside over the next twelve months.

The near-term view on FedEx is marred by the short-term headwinds of the ongoing Russia-Ukraine war and the post-pandemic effects of COVID-19. However, going forward, the company is capable of boosting its performance with the scale and depth it has established over the years and will continue to increase its moat.

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