Stock of the week - FedEx (21.12.2023)

• FedEx slumped over 12% on Tuesday
• Plunge was triggered by disappointing fiscal-Q2 2024 earnings release
• Company missed revenue and profit expectations
• Express unit margins drop significantly
• A look at valuation
• Share price dropped below $250 support zone

FedEx (FDX.US) released its fiscal-Q2 2024 earnings report on Tuesday after close of market session. Disappointing earnings triggered a share price slump during Wall Street trading on Wednesday. Stock suffered the biggest single-day drop in 15 months yesterday! Let's take a quick look at company's earnings as well as at its valuation!

Disappointing fiscal-Q2 2024 earnings release

FedEx published its fiscal-Q2 2024 earnings report on Tuesday after Wall Street session close. The report turned out to be worse than expected, with revenue and, especially, profits missing expectations. While sales were lower year-over-year, profits increased compared to a year ago quarter. Nevertheless, this was the first adjusted EPS miss since fiscal-Q1 2023 (calendar June - July 2022).

However, it was revised full-year forecasts for fiscal-2024 that were the main source of concern for investors. While adjusted EPS and capital expenditures forecast were in-line with market expectations, FedEx no long expected fiscal-2024 revenue to be 'about flat' and instead expects it to decline by 'low-single-digit'.

Fiscal-Q2 2024 earnings

• Revenue: $22.2 billion vs $22.41 billion expected (-2.8% YoY)
• Adjusted EPS: $3.99 vs $4.19 expected ($3.18 a year ago)
• Adjusted operating income: $1.42 billion vs $1.49 billion expected (+13.6% YoY)
• Adjusted operating margin: 6.4% vs 6.6% expected (5.4% a year ago)

Full-year fiscal-2024 forecasts

• Adjusted EPS: $17.00-18.50 vs $18.22 expected (unchanged)
• Capital expenditures: $5.7 billion vs $5.7 billion expected (unchanged)
• Revenue growth: 'Low-single-digit decline' vs 'about flat' in previous forecast

FedEx earnings release history for the past 20 quarters. Source: Bloomberg Finance LP, XTB Research

FedEx with the biggest single-day drop in 15 months!

Report was seen as a big disappointment, with revenue continuing to drop amid declining volumes. Guidance for the full fiscal year was also seen as a disappointment. Results of the Performance at FedEx' Express unit, company's biggest in terms of sales, were especially disappointing, with operating margin deteriorating from 3.1% in fiscal-Q2 2023 to 1.3% in fiscal-Q2 2024. Unit had margins as high as 8.7% during quarters with pandemic-hit supply disruptions. Lackluster performance of the Express unit could be a sign of shifting trends with customer seeming to sacrifice ultra-fast delivery times for cheaper delivery pricing. However, drop in demand is not offset by drop in costs, as the company still has to handle and maintain a fleet of aircraft. Having said that, downsizing of Express unit cannot be ruled out should the trend prove to be more persistent.

Given the worrying outlook explained above, a steep plunge in FedEx share price should not come as a surprise. In fact, it was the biggest single-day drop company's stock has suffered in 15 months!

Source: Bloomberg Finance LP, XTB Research

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.

DCF

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. Detailed forecasts for 10 years were made, with terminal value assumptions being set as follows - 5% terminal revenue growth and 7% terminal weighted cost of capital (WACC). Such a set of assumptions provides us with an intrinsic value of FedEx shares of $312.35 - or almost 27% above yesterday's closing price of $246.25. Terminal value forecast accounts for around 83% of DCF valuation.

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

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, Deutsche Post, DSV, CH Robinson and Expeditors International of Washington. We have taken a look at 6 different valuation multiples - P/E, P/BV, P/S, P/FCF, EV/Sales and EV/EBITDA.

Trimmed averages of different multiple valuation (excluding the highest and the lowest values) have been calculated. As one can see, valuations obtained this way are significantly above current market price of $246.25. The most 'conservative' valuation, based on multiple means, suggests an around 40% upside from current market prices while the highest valuation, based on medians, suggests over-60% upside.

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. We have assumed an 8% dividend growth rate as well as historical average required rate of return of 10%. Such a set of assumptions provides us with a valuation of $248.40 per FedEx share - less than 1% above yesterday's cash closing price of $246.25.

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 is 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

A look at the chart

Taking a look at FedEx chart (FDX.US) at D1 interval, we can see that yesterday's plunge was indeed massive. Price plunged from the $280 resistance zone, marked with 78.6% retracement of the downward move launched in 2021, and moved below the $250 support, marked with 61.8% retracement. An attempt was made to climb back above the $250 zone yesterday after the launch of the Wall Street cash session, but it turned out to be a failure and the stock finished trading at daily lows.

Key near-term levels to watch in case pullback continues are $245 area, marked with the 200-session moving average (purple line), as well as $240 area, marked with the lower limit of the Overbalance structure. A break below the $240 area would, at least in theory, mean that the uptrend is over, and the stock is now in a downtrend. FedEx trades around 1% higher in premarket today and should we see attempts to recover yesterday's losses, the aforementioned $250 resistance will become a level to watch.

Source: xStation5