This shipping company just reported 60% growth in earnings and 13.5% increase in revenues, for the second quarter. Both EPS and revenues beat estimates, coming in at $4.87 and $19.3 billion, respectively.
FedEx Corporation (FDX)
From Argus Weekly Staff Report
Our rating on FedEx Corporation is BUY. This large-cap blue-chip industrial company has benefited over the past few years from solid growth in the consumer sector, and especially from growth in e-commerce.
FedEx operates three major segments: FedEx Express (51% of FY20 revenue), Ground (33%); and Freight (10%).
The shares fell sharply in 2018-2019 in the wake of a difficult acquisition and on concerns over trade and tariffs. Then the coronavirus hit, reducing Express and Freight demand. But FedEx Ground is growing strongly, and management is taking steps to bolster margins. The balance sheet is solid.
Based on our forecasts for economic weakness through the balance of 2020 before a turnaround begins in 2021, we are maintaining our FY21 EPS forecast of $10.40. Our estimate implies a return to growth, with an increase of 9%. We look for growth to pick up in FY22 and are maintaining our EPS forecast of $12.00. Our five-year earnings growth rate forecast is 8%. We are raising our 12-month target to $250, or 21-times our FY22 EPS estimate, at the high end of the stock’s historical range as earnings recover.
We think that FDX shares are attractively valued at current prices near $220. The shares are near the high end of their 52-week range of $88-$231. On a technical basis, they had been in a bearish pattern of lower lows and lower highs since establishing an all-time high of $274 in January 2018, but the stock recently formed a double-bottom, and the trend since then has been higher.
To value the stock on a fundamental basis, we use peer and historical multiple comparisons, as well as a dividend discount model. FDX shares are trading at 18-times our FY22 EPS estimate, above the midpoint of the historical range of 9-21, though we note that margins are historically low and likely to rise. On a price/sales basis, the shares are trading at a multiple of 0.9, near the high end of the five-year range of 0.5-1.0. The yield of about 1.1% is below the midpoint of the five-year range.
We are raising our 12-month target to $250, or 21-times our FY22 EPS estimate, at the high end of the stock’s historical range as earnings recover.
FedEx is due to report 1Q results on September 15, and we expect to see another earnings beat along with sequential improvement.
Jim Kelleher, CFA, Argus Weekly Staff Report, argusresearch.com, 212-425-7500, September 10, 2020