How Many Packages Must FedEx Ship to Justify Its Stock Price?

FedEx (FDX) has been the topic of a lot of analyst talk lately, understandable as the company tends to forebode economic troubles of the macroeconomy. Concerns abound about how much freight volume at FedEx will decline, and when it will begin to grow again. This makes the company strong candidate for a Required Business Performance (RBP) analysis. While most analysts will conjecture as to when and at what level volume will increase, making a recommendation accordingly, I think a better approach to uncertainty like this is to ask what the current stock price tells us about FedEx’s future.

At $53/share, what performance must the company produce lest the stock be overvalued?

After performing a reverse discounted cash flow analysis, we see that the current price of FedEx stock implies that revenue will decline by 2.4% in the upcoming twelve months. (See FedEx’s RBP Snapshot) Breaking this down by components, a revenue decline of this size implies that FedEx Express International Priority – the company’s largest business segment by revenue – will see average daily package volume decline from 791,000 (over the twelve months ended in February) to 772,000. FedEx ground, the company’s second largest segment, must see average daily package volume of 3,325,000 in order to support the company’s current stock price.

To put this in perspective, international average daily volume was 813,000 for the year ended May 2008, up nearly 31% from the FY 2007. (And 2007 average daily volume was up 21.3% over 2006). So despite the seemingly tame decline of only 2.7% from 2008 to 2009, for a fast growing segment within FedEx this is quite substantial and is indicative of the economic struggles throughout the world economy. The question now is whether volume will continue to decline at the same rate that it has over the past year or whether it will plateau or even start to grow. Is a price that implies negative growth for a segment that has seen extraordinary positive growth over recent years unjustifiably low? Has the market overreacted to concerns for global shipping volume?

Of course there are caveats to this analysis due to unpredictable near-term nature of FedEx’s cost structure. If drivers and package handlers unionize, a proposition that now seems much more likely, revenues will need to be somewhat higher to offset presumably higher wages. Nevertheless, on an all-else-equal basis, it is enlightening to know that the company will need to ship 772,000 international priority packages a day over the next year to justify a current stock price of $53.