FedEx Earnings Preview: Earnings Momentum In Full Swing, Biz Model Tailor-Made For Volume Explosion
Summary
- EPS estimates continue to be revised higher.
- Ground volumes rose 25% and 31% in the May and August '20 quarters, ample evidence of the strain ecommerce has put on the delivery chain.
- From Nov '20 through May '21 FDX is facing very easy compares, then those compares get much tougher.
- FDX's valuation is cheap on a PE-to-Growth basis, but now getting fully valued on a price-to-revenue basis.
When FedEx (NYSE:FDX) reports their fiscal Q2 '21 financial results after the bell on Thursday, December 17th, 2020, the Street will be looking for $4.01 in earnings per share (EPS) on roughly $19.5 billion in revenue, for expected y/y growth of 60% in EPS on 12% revenue growth.
The stock is up 99% year to date with the vast majority of that coming after the early July 2020 earnings report.
FedEx's stock peaked in January 2018 at $274-275 per share and since that time or rather since December 31, 2017, has returned about 7.5% per year versus the S&P 500's 13.60%.
One of the more remarkable statistics heard during the 2020 Covid-19 pandemic from CEOs and CFOs reporting their quarterly results since July 1, was the comment FedEx CFO's proxy made on the Sept '20 conference call:
The second and perhaps more profound trend is the acceleration of ecommerce. Pre-COVID, we projected that the U.S. domestic market would hit a 100 million packages per day by calendar year 2026. We now project that the U.S. domestic parcel market will hit this mark by calendar year 2023 pulling volume projections forward by three years from the previous expectation."
In the August '20 quarter or the 1st fiscal quarter of 2021, reported in Sept. '20, EPS beat estimates by a whopping 81% ($4.87 versus the estimate of $2.69) while revenue beat by 10% ($19.3 billion versus $17.5 billion).
For the 4th fiscal quarter of 2020, reported in early July '20, EPS estimates beat by 66%, on a 6% revenue upside.
It is clear that FedEx has EPS and revenue momentum (and the stock has traded like a "mo-mo" stock since early July '20), and now that the vaccine distribution is upon us, this could further catalyze FedEx's EPS and revenue momentum particularly for the second half of fiscal 2021, which is the December '20 through May 31 '21 period.
So why worry?
Well, there is probably little reason to worry over the next 3-6 months with easy compares, an explosion in ecommerce volume and expanded margins for the FedEx segments thanks to the sudden increase in volume.
Let's look at forward EPS and revenue estimates:
| Q2 '21 (est) | Q1 '21 | Q4 '20 | Q3 '20 | |
| fy 2023 est EPS | $20.92 | $19.59 | $13.13 | $14.53 |
| fy 2022 est EPS | $18.11 | $17.13 | $12.43 | $13.03 |
| fy 2021 est EPS | $16.43 | $15.75 | $10.37 | $11.34 |
| fy est 2023 EPS gro | 16% | 14% | 6% | 11% |
| fy est 2022 EPS gro | 10% | 9% | 20% | 15% |
| fy est 2021 EPS gro | 73% | 66% | 9% | 13% |
| fy est 2023 P.E. | 14x | 13x | 12x | 7x |
| fy est 2022 P.E. | 16x | 15x | 13x | 8x |
| fy est 2021 P.E. | 17x | 16x | 5x | 9x |
| fy est 2023 rev est | $85.99 | $79.4 | $78.3 | $79.8 |
| fy est 2022 rev est | $80.6 | $75.9 | $74.99 | $74.3 |
| fy 2021 rev est | $76.8 | $71.2 | $71.4 | $71.1 |
| est 2023 rev gro | 7% | 5% | 4% | 7% |
| est 2022 rev gro | 5% | 5% | 5% | 5% |
| est 2021 rev gro | 11% | 4% | 3% | $3% |
- Estimate source: IBES data by Refinitiv
- Fy est = fiscal year estimate
The most compelling aspect to the above table is the "estimated EPS growth" or the second set of rows. Note the sharp acceleration in growth rates for fiscal 2021 (ended May '21) and then the more subdued estimated growth rates for fiscal '22, ended May '22.
Trading at an average of 33% expected growth in the next 3 years, distorted mainly by the sharp growth acceleration this year, FDX is still trading at a very reasonable multiple of forward EPS of 15x for pretty decent growth ahead.
How does FedEx Biz Model Correlate to Volume Changes?
Source: internal valuation s/sheet
This spreadsheet is meant to show readers how the change in revenue generated outsized changes in operating income and EPS growth, which is typical for companies like FedEx, which has a high degree of fixed costs.
This analyst doesn't have an operating income estimate for fiscal q2 '21.
As readers can see, FedEx experienced 8 consecutive quarters of negative operating income growth (see highlighted part of s/sheet) on what was still modestly positive revenue growth for the transport giant.
Covid-19 has been an unexpected positive catalyst for FedEx.
Technical analysis:
Source: Worden Telechart Gold
Readers can see how FedEx has traded above the January '18 high of $274-275 but has stopped waiting on the next catalyst from (hopefully) the Nov '20 earnings report.
Valuation:
| FedEx metric | |
| 3-yr avg est EPS gro rt | 33% |
| 3-yr avg est Rev gro rt | 8% |
| 3-yr avg PE | 16x |
| Price-to-revenue | 1.02x (EST) |
| Price-to-cash-flow | 9x |
| Price-to-free cash flow | 51x |
| Div yield | 1% |
| Mstar moat | narrow |
Source: internal valuation s/sheet
Using the balance sheet and cash-flow data from the August '20 quarter reported in September '20, the above is a quick breakdown of the frequently-cited valuation metrics.
The long-term issue for FedEx is the free cash flow generation. This topic was written about in December '18 here and it may be the most significant obstacle to valuation expansion for the transport giant.
When operating income goes negative for FedEx so typically does free cash flow, and that typically means piling in debt to use as a source of funds.
This keeps FedEx's dividend somewhat restrained and results in share repurchases disappearing for long periods of time.
Here is FedEx's cash-flow statement. Ignore the black box and instead focus on the bottom rows and the share repurchases line.
This is a longer-term issue for FDX.
The other issue with FedEx, looking at current data, is that typically, and this author has modeled the stock since the late 1990s, when price-to-revenue metric gets up to 1.0x (that is market-cap divided by 4-quarter trailing revenue) PE expansion and valuation expansion stop.
That doesn't mean FedEx (the stock) will stop rising, it just means the pace of ascent may slow materially in coming quarters as the ecommerce beneficiaries from 2020 start to lap tougher compares in 2021.
Summary/conclusion:
FedEx has been a huge beneficiary of the explosion in ecommerce volume, both in terms of margins and revenue.
The question is how much is sustainable beyond calendar 2021 and what kind of disruption will occur in the space as the stresses on the delivery chain, particularly for Ground and the "last mile" delivery chain.
The other issue is can FDX ever generate sustainable free cash flow to repurchase stock in a predictable fashion and improve that dividend.
The PE-to-growth valuation for FDX looks pretty cheap but the price-to-revenue is up around its 20-year maximum at 1.0x revenue.
Not mentioned in the body of the article is that the vaccine rollout globally may not be as "silky smooth" as the mainstream media leads us to believe. I have to think that the delivery chain - "planes, trains and automobiles" as well as trucks - will be stressed to the maximum with both ecommerce volume and vaccine delivery needs in the next few months.
Clients have a 1-1.5% position in the stock, most of it acquired between $150-175 and a long-term position bought in the year 2000 at a $35 cost basis.
Patient investors might get another chance to pick up FDX cheaper in the next 6 months.
This article was written by
Disclosure: I am/we are long FDX. 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.