Stock of the week - FedEx (27.06.2024)

• FedEx jumped over 15% after fiscal-Q4 earnings
• Stock made the biggest single-day jump in history
• Cost-cutting is going well
• FedEx expects positive sales growth in fiscal-2025
• $2.5 billion in buybacks expected in fiscal-2025
• A look at valuation
• FedEx climbs to the highest level since July 2021

FedEx (FDX.US) shares surged over 15% on Wednesday, marking the biggest single-day jump for the stock in history. Surge was triggered release of fiscal-Q4 2024 earnings report. While results turned out to be slightly better than expected, company surprised with an upbeat full-year outlook and buyback announcement. Let's take a look at the company and recent news.

FedEx jumps 15% after fiscal-Q4 2024 earnings

FedEx surged over 15% yesterday in response to fiscal-Q4 2024 earnings release on Tuesday evening (for quarter ended on May 31, 2024). Report showed mixed results, with revenue coming in-line with expectations and operating income missing estimates. However, adjusted operating income turned out to be better-than-expected. Overall operating margin deteriorated compared to a year ago, but segments in Ground and Freight divisions improved. Company reported better-than-expected net income and earnings per share. Free cash flow was lower than a year ago but significantly higher than expected. Capital expenditures missed expectations noticeably.

An over-15% post-earnings price surge was the biggest one-day jump for FedEx stock on the record.

Fiscal-Q4 2024 results

• Revenue: $22.10 billion vs $22.10 billion (+0.9% YoY)
  • Express: $10.42 billion vs $10.40 billion expected  (+0.1% YoY)
  • Ground: $8.49 billion vs $8.51 billion expected (+2.4% YoY)
  • Freight: $2.31 billion vs $2.33 billion expected (+1.6% YoY)
  • Services: $59.0 million vs $72.7 million expected (-22.4% YoY)
• Operating income: $1.555 billion vs $1.757 billion expected (+3.5% YoY)
  • Express: $201 million vs $939 million expected (-53.3% YoY)
  • Ground: $1.104 billion vs $1.132 billion expected (+10.0% YoY)
  • Freight: $506 million vs $446 million expected (+13% YoY)
  • Other, eliminations: -$256.0 million vs -$275.3 million expected (-$379 million a year ago)
• Operating margin: 7.0% vs 8.1% expected (6.9% a year ago)
  • Express: 1.9% vs 4.0% expected (4.1% a year ago)
  • Ground: 13.0% vs 13.7% expected (12.1% a year ago)
  • Freight: 21.9% vs 19.5% expected (19.7% a year ago)
• Adjusted operating income: $1.873 billion vs $1.827 billion expected (+6.0% YoY)
  • Adjusted operating margin: 8.5% vs 8.25% expected (8.1% a year ago)
• Adjusted EBITDA: $2.977 billion vs $2.919 billion expected (+4.9% YoY)
• Adjusted pre-tax income: $2.028 billion vs $1.765 billion expected (+16.4% YoY)
• Adjusted net income: $1.344 billion vs $1.327 billion expected (+7.2% YoY)
• Adjusted EPS: $5.94 vs $5.22 expected ($6.05 a year ago)
• Adjusted diluted EPS: $5.41 vs $5.34 expected ($4.94 a year ago)
• Capital expenditures: $1.202 billion vs $1.463 billion expected (-31.4% YoY)
• Free cash flow: $1.496 billion vs $1.100 billion expected (-11.6% YoY)

FedEx made the biggest single-day jump in history in response to fiscal-Q4 2024 earnings release. Source: XTB Research

FedEx expects positive sales growth in fiscal-2025

While 0.9% YoY increase in fiscal-Q4 revenue may seem small, it should be noted that it comes after a period of weakness. FedEx revenue declined on a year-over-year basis in each quarter between fiscal-Q2 2023 and fiscal-Q3 2024, so a small positive growth can be seen as an achievement. Nevertheless, revenue in full fiscal-2024 was 2.7% YoY lower than in fiscal-2023. However, company expects full-year sales growth to turn positive this year (fiscal-2025), expecting a growth of 'low- to mid-single digit'. Also company expects full-year adjusted EPS of $20.00-22.00, with midpoint of this range ($21.00) being above analysts estimate ($20.85). 

Surge in share price is likely also supported by buyback announcement - FedEx plans to spend $2.5 billion on share repurchases in fiscal-2025.

Fiscal-year 2025 forecast

• Revenue growth: 'low to mid single-digit growth'
• Adjusted EPS: $20.00-22.00 vs $20.85 expected
• Capital expenditures: $5.20 billion vs $5.55 billion expected
• Buybacks: $2.5 billion

FedEx managed to report positive sales growth for the first time since fiscal-Q1 2023 and expects full-year fiscal-2025 to be positive as well. Source: Bloomberg Finance LP, XTB Research

Cost-cutting is going well

FedEx said that its cost-cutting measures are paying off and that it is in the midst of reaching its target of $4 billion in cost reductions. Company has taken effort to minimize expense and has as recently as earlier this month announced large workforce reduction, saying it plans to reduce headcount in Europe by up to 2,000 jobs. Company aims for $2.2 billion of permanent cost reductions this fiscal year. Also, investments have been depressed in recent two fiscal-years, but are expected to pick-up slightly this year and increase significantly in fiscal-2026.

Overall, the company has been struggling to improve margins in recent quarters, but fiscal-Q4 2024 saw big improvement, especially in the Freight segment. FedEx said that was driven by higher yield and more effective cost management.

We have said that the company is in a midst of achieving its $4 billion cost reduction target. The remaining $2 billion are expected to come from business consolidation. 

FedEx operating margin by segment. Source: Bloomberg Finance LP, XTB Research

Freight business spin-off?

FedEx plans to consolidate its business, by combining Express, Ground and Services segments into a single unit. This restructuring is aimed at achieving cost reductions as well as improve efficiency of company's operations. Combining Ground and Express divisions will be a big shift from a two-networks system the company has operated for years, although it looks needed as Express segment is struggling amid lower demand for air shipping services.

However, the biggest announcement came regarding the Freight business. While FedEx did not announce anything specific, the company said that it will review options for its freight business, making investors and analysts wonder whether a divestment of the unit may be coming. Freight is the smallest of major FedEx segments in terms of revenue, but it is also a business with the highest margin, accounting for around 10.4% of total revenue in most recent quarter and for almost 28% of total operating income. FedEx decline to specify why it is reviewing the company, but process of reviewing Freight's place in company's business portfolio is well underway. Although Freight is a high-margin business for FedEx, the segment has been struggling with sub-par sales growth in recent quarter and divestiture may help company unlock the value, but will mean 

FedEx revenue breakdown by segment. Source: Bloomberg Finance LP, XTB Research

FedEx operating income breakdown by segment. Source: Bloomberg Finance LP, XTB Research

A look at valuation

Let's take a quick look at FedEx' valuation with 3 often used valuation methods - DCF, multiples and Gordon Growth Model. We want to stress that those valuations are for presentation purposes only and should not be viewed as recommendations or target prices.

Discounted Cash Flow

Let's start with probably the most popular fundamental model for valuing stocks - Discounted Cash Flow method (DCF). This model relies on a number of assumptions. We have decided to take a simplified approach and base those assumptions around averages for the past 5-years. However, we have made some adjustments to those in order to capture an improvement in outlook. Detailed forecasts for 5 years were made, assuming 5% revenue growth and 8% operating margin. Terminal value assumptions being set as follows - 3% terminal revenue growth and 6% terminal weighted cost of capital (WACC). Such a set of assumptions provides us with an intrinsic value of FedEx shares of $403.42 -over 35% above yesterday's cash close. 

A point to note is that the intrinsic value obtained via the DCF method is highly sensitive to assumptions made. A sensitivity matrix for different sets of Operating Margin and Revenue Growth assumptions have been provided below.

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

Multiples

Next, let's take a look at how FedEx valuation compares with peers. We have constructed a peer group consisting of 5 companies, which are considered to be FedEx competitors. Those include United Parcel Services, DHL Group, DSV, Expeditors International of Washington and ZTO Express. We have taken a look at a number of different valuation multiples and results can be seen in the table below.

As one can see, there is some volatility in the multiples for FedEx peers. Nevertheless, valuations based on means, medians and cap-weighted multiples suggest that FedEx is undervalued compared to peers. Only price-to-free-cash-flow multiples and cap-weighted EV/EBITDA multiple suggest that FedEx is overvalued.

Source: Bloomberg Finance LP, XTB Research

Gordon Growth Model

Let's move to the third valuation method - Gordon Growth Model. This method relies on dividends and given that FedEx is a dividend-paying stock with a long history of payouts, it can be used to value company's stock. Company has recently boosted its quarterly dividend to $1.38 per share, an increase of almost 10% compared to previous dividend of $1.26 per share. We have assumed an 8.5% dividend growth rate as well as historical average required rate of return of around 10%. Such a set of assumptions provides us with a valuation of $399.28 per FedEx share - slightly above yesterday's cash close.

As it is usually the case with valuation models, the Gordon Growth Model is also highly sensitive to assumptions made. Sensitivity matrix for dividend growth and required rate of return assumptions are provided below. Green tiles show combinations that result in above-market valuation, and red tiles show combinations that result in below-market valuations.

Source: Bloomberg Finance LP, XTB Research

FedEx climbs to the highest level since July 2021

Last but not least, let's take a look at FedEx chart. Taking a look at the chart at D1 interval, we can see that the stock has been trading in an upward channel recently. Stock tested the upper limit of the channel in the $290 area after release of the fiscal-Q3 earnings report in March 2024. However, bulls failed to push the price above this hurdle and a pullback was launched, with the stock moving back to the lower limit of the channel and the lower limit of a local market geometry. History seems to be repeating itself as stock has once again caught a bid, this time after fiscal-Q4 earnings release, and has once again rallied to the upper limit of the channel. Share price broke above the previous local high in the $290 area and climbed to the levels not seen since July 2021.

FedEx (FDX.US) made the biggest single-day jump in history and climbed to the highest level since July 2021. Source: xStation5