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Here is a look at how FedEx (NYSE:FDX) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least four of the following five tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $174.52
MG Opinion Fairly Valued
Value Based on 3% Growth $83.17
Value Based on 0% Growth $48.76
Market Implied Growth Rate 7.93%
Net Current Asset Value (NCAV) -$14.23
PEmg 24.36
Current Ratio 2.08
PB Ratio 2.52

Balance Sheet - 8/31/2013

Current Assets $11,493,000,000
Current Liabilities $5,523,000,000
Total Debt $2,739,000,000
Total Assets $33,673,000,000
Intangible Assets $2,712,000,000
Total Liabilities $16,018,000,000
Outstanding Shares 318,000,000

Earnings Per Share

2014 (estimate) $6.84
2013 $4.92
2012 $6.41
2011 $4.58
2010 $3.77
2009 $0.31
2008 $3.61
2007 $6.48
2006 $5.83
2005 $4.72
2004 $2.76
2003 $2.74

Earnings Per Share - Modern Graham

2014 (estimate) $5.74
2013 $4.79
2012 $4.39
2011 $3.51
2010 $3.31
2009 $3.45

Conclusion:

FedEx is a company whose earnings have been a little unstable over the 10-year historical period we've reviewed. The company showed great growth during the first half of the period, then had a strong pullback from $6.48 in EPS for 2007 to $0.31 for 2009. This drop can probably be attributed significantly to the recession, but it is noteworthy nonetheless. In addition, the earnings issue has affected the company's standing with Defensive Investors, as it has led the company to fail the Defensive Investor's earnings growth requirement. The company also fails the Defensive Investors requirements of low PEmg and PB ratios, and hence is not suitable for the Defensive Investor. However, Enterprising Investors are more willing to take on risk than their Defensive Investor counterparts, and FedEx passes the Enterprising Investor's requirements with flying colors. From the valuation side of things, the market currently implies a growth rate of 7.93%, and that growth is supported by the recent trend in the earnings after the company has grown EPSmg (normalized earnings) from $3.45 in 2009 to an estimated $5.74 for 2014. As a result, the company appears to be fairly valued and Enterprising Investors should feel comfortable proceeding with further research to determine if it is suitable for their individual portfolios.

Disclaimer: The author did not hold a position in Fedex Corporation (FDX) at the time of publication and had no intention of entering into a position within the next 72 hours.

Source: ModernGraham Valuation Of FedEx