FedEx - Have You 'Missed The Boat'?

| About: FedEx Corporation (FDX)


FedEx’s share price has increased materially as of late.

However, this alone does not mean that investors have "missed the boat".

This article illustrates why shares could still be offering a "fair shake".

Since the end of January of 2016, shares of Tennessee-based delivery service company FedEx (NYSE:FDX) are up about ~44%. And when you see something like that it can be easy to dismiss the security, thinking that you have "missed the boat." Yet at the same time, I'm reminded that just because a great deal is no longer offered, this does not simultaneously indicate that today's value proposition is now a poor one.

In other words, it can be helpful to give the security a chance before automatically casting it aside. Let's start with some history:

The above table is what I like to refer to as "five component investing." It highlights the major aspects of the business and gives you some insight into why a particular investment may have performed as it did. Note that FedEx's fiscal year ends in May.

On the top line, FedEx put together solid growth - increasing sales from $35 billion in sales during 2007 up to $50 billion last year. This mark was further supplemented by a steady profit margin, increasing just slightly.

The business grew profits at a 4.3% annual rate ($2.07 billion to $3.02 billion), but shareholders saw a bit better results as a consequence of the share repurchase program. FedEx was able to reduce the number of common shares outstanding from about 308 million down to 265 million or so - allowing earnings-per-share to grow by 5.5% per annum over the nine-year period.

Now, for a lot of companies, this type of growth would set up investors for solid returns. However, FedEx had a couple of things working against it.

For one thing, the valuation compressed over this period - going from around 17 times earnings down to 15 or so. This resulted in share price growth of 4.4% per year. And the dividend - while growing nicely - only makes up a small fraction of earnings, so this wasn't a large contributing factor either.

All told, an investor that held from fiscal years 2007 through 2016 would have seen total returns on the magnitude of 4.8% per annum. Just to give you a point of reference, that's the sort of thing that would turn a $10,000 starting investment into $15,000 or so after nine years - fine, but not great.

Now, there are some important follow up points. To be fair, 2007 was the peak for FedEx. The company would go on to make less money in 2008 through 2013 (still quite profitable, but less than 2007) before getting back to pre-recession growth in 2014. As such, the investment results are greatly skewed by the time period chosen.

If you went back to say 2003, earnings-per-share grew by about 11% per year and an investment would have returned roughly 8% per annum. Or from 2012 to today, you would have observed 13% earnings-per-share growth with 17% annual investment results. The point is that while the above table is instructive, it's not necessarily all telling.

Still, we can glean a variety of items. For instance, solid but not exceptional revenue growth is probably a reasonable starting point. The profit margin has ranged from ~3% to ~6% over the last decade, with the current mark being on the higher end. The share repurchase program is apt to play a strong role in capital returns. And the dividend, while well covered and growing nicely, probably will not add materially in the next few years.

Which brings us to today. A lot of these same characteristics of the past can carry through to the future.

FedEx has told investors to anticipate adjusted earnings-per-share of between $11.85 and $12.35 for fiscal year 2017. In addition, the company has a goal of increasing earnings-per-share by 10% to 15% per year. As we saw above, this part can be somewhat out of the company's hands. It controls expenses, efficiencies, capital allocation decisions etc., but the business will still ebb and flow with the overall economy. In other words, the feasibility of reaching 10% to 15% EPS growth depends on if your observation period is starting in 2004, 2007 or 2012 as examples. And, naturally, we don't yet know which type of starting place we're at today.

Analysts are also presently anticipating rather solid growth - to the tune of about ~11% per year over the intermediate term. For our beginning baseline, let's scale that back a bit - call it 6% per year instead, quite close to what was achieved over a longer period when FedEx started at a "top."

At that rate, you might anticipate $16.20 or so in per share earnings after half a decade. A "typical" valuation for FedEx over the years has been around 17 or 18 times earnings (with a range anywhere from ~10 to ~25 times earnings). Using 17 times earnings, this would equate to a future price anticipation of about $275.

The dividend is exceptionally well covered, but will likely only add in a small way. If the dividend were to grow by 10% annually, you'd anticipate receiving another $11 or so in per share cash payments. This would equal a total anticipated value of about $286. Expressed differently, based on a starting share price near $191, this would equate to total anticipated return of about 8.4% per annum.

Now, obviously, things could go much better or worse. If FedEx were only able to grow at say 3% yearly and later trades at 14 times earnings, as an example, you'd be looking at potential returns of about 2.5% annually. On the other hand, should that double-digit growth formulate you'd be looking at potential returns of 12%+ per year.

The point is to come up with a baseline that you feel comfortable with and see what that might mean for a potential investment. It can be easy to see a security increase in price by 40%+ and think that you have missed your opportunity. Yet as we just saw above, shares could still be offering a reasonable deal at this higher level.

Even with marginal expectations - 6% growth instead of 10%+, a payout ratio staying under 20% and an average valuation multiple - investors could still see ~8% annual returns. Working through scenarios like this are a great illustration as to why you might not want to immediately toss aside a potential investment idea. So, what do you think? Have you "missed the boat" or are shares of FedEx still offering a "fair shake?"

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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