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FedEx – Adding to My Existing Position

FedEx released its Q1 FY2019 results on September 17 and the stock pulled back ~5.5%. The stock price has subsequently recovered slightly but still remains in 'fairly valued' territory.

Summary

  • FDX released its Q1 2019 results on September 17th which reflected adjusted earnings of $3.46/share versus a forecast of $3.80/share.
  • Revenue of $17.18B exceeded expectations of $16.87 and full-year EPS outlook has been raised to $17.20 - $17.80 versus prior forecast of $17 - $17.60.
  • While the tariff issue is front and center on many minds, FDX has indicated the impact on its business is not expected to be significant but that it continues to closely monitor the situation and is ready to adjust according to market conditions.
  • The well publicized cyberattack on TNT’s systems increased the cost, complexity, and timeframe as it relates to the TNT integration. Major progress, however, has been made within the past year and management is confident it will reach $1.2 - $1.5B of operating income improvement at FedEx Express in FY2020.
  • FDX shares are currently attractively valued based on recently upwardly revised earnings projections.

Introduction

In an environment in which investors are willing to:

  • invest in companies producing products of questionable benefit to society;
  • acquire virtual currencies where the true value is unknown or susceptible to manipulation (to a greater extent than conventional currencies);
  • gamble on companies developing products which have a very remote chance of ever receiving all the appropriate regulatory approvals so they can eventually become commercialized;
  • invest in highly overvalued but profitable and well managed companies;
  • invest in companies where leadership appears to be preoccupied with being in the limelight;

it is refreshing to know that there are some reasonably valued companies that suffer from none of the above shortcomings.

Case in point….FedEx (NYSE: FDX).

This is a company in which it is next to impossible to duplicate its global network. It has the world’s largest all-cargo airline and it connects 92% of the world’s GDP in 1–2 business days. It employs more than 425,000 people and has:

  • 670 aircraft;
  • 5,000 hubs and facilities;
  • 180,000 motorized vehicles;

which deliver more than 14 million shipments per day!

In my initial FDX article I explained how short-sighted thinking roughly 19 years ago resulted in me sacrificing several thousands of dollars over the long-term for the sake of a quick buck within the short-term.

I have subsequently followed up that article with two more FDX articles (here and here) in which I have recommended readers not make the same mistake I made and to focus on this company’s long-term growth potential.

While I was on my recent vacation which took me through regions with spotty internet access, FDX released its Q1 2019 results. Despite strong results, the investment community knocked FDX’s stock price from a $255.73 September 16 closing price to a $241.60 September 17 closing stock price; it has subsequently recovered to $248.33 as I compose this article. Even though FDX raised its full-year profit outlook and Q1 revenue topped expectations, the ~5.5% drop was because FDX reported mixed financial results for Q1.

In my opinion, long-term investors should not fret too much about quarterly results and earnings projections. A fiscal quarter is pretty much a blink of an eye and there are a host of factors which can positively/negatively impact short-term results.

I know I certainly cannot consistently accurately predict how a company’s stock price is going to perform in the short-term. As a result, I focus on how a company has historically performed relative to plan and how the company is executing so as to achieve its mid- and long-term goals and objectives.

Well Positioned for Profitable Growth

FDX stands to benefit from the continued growth in E-commerce, including B2B e-commerce, and global trade growth. Its strategic acquisition of TNT (discussed in my March 23, 2017 article) for the purpose of improving ground operations in Europe was expected to be a monumental undertaking but the cyberattack at TNT certainly complicated and lengthened the timeframe in which this integration was expected to be completed.

On the Q1 analyst call, FDX indicated:

‘The integration of our sales teams is well underway, and we will complete the sales integration this fiscal year. During Q1, integration activities began in all of our major markets in Europe, and we anticipate the completion of the integration in the Middle East at the end of this calendar year. Our integration of TNT continues to expand our network, improve our global capabilities and our competitive posture and, of course, increase profitability. We are very confident in reaching the $1.2B - $1.5B of operating income improvement at FedEx Express in FY2020 over FY2017.’

Naturally, the above is based on the assumption of moderate economic growth, stability in global trade and current accounting rules and tax laws.

The following are the macroeconomic projections upon which FDX has based its projected results.

FDX - Macroeconomic Trends - August 30 2018

Source: FDX – Investor Relations Presentation – September 21, 2018

The issue of tariffs will undoubtedly impact FDX to some extent but management has indicated that only a small portion of its volume coming out of China is expected to be impacted. The overall uncertainty surrounding the tariff issue, however, will have a broader impact on the market and FDX is continually and carefully monitoring any new developments on the global trade front and is ready to adjust its strategies according to market conditions.

In addition to being well positioned to take advantage of the anticipated growth in E-commerce, FDX is also expected to slowly wind down its capital expenditure program. In FY2015 – FY2018, CAPEX amounted to ~$4.4B, ~$4.8B, ~$5.1B, and ~$5.7B; the CAPEX projection for FY2019 is ~$5.6B.

Couple this CAPEX reduction with the completion of the TNT integration noted above and you get what can potentially be a very profitable FY2020 and FY2021.

Naturally, there is always the risk that Amazon’s (NASDAQ: AMZN) expansion into FDX’s wheelhouse will create some disruption but I am reasonably confident that FDX’s management is spending a considerable amount of time in developing a strategy on how to compete with this new industry participant.

Q1 2019 Results

On September 17, 2018, FDX released its Q1 results for which a high level snapshot is provided below.

FDX - Q1 2019 vs Q1 2018 Results

Source: FDX – Q1 2019 Earnings Release – September 17, 2018

FY2019 Guidance

The following revised and previously provided EPS and adjusted EPS projections found in FDX’s September 17, 2018 Earnings Release is provided below.

  • Revenue growth of approximately 9%;
  • Operating margin of approximately 7.9%;
  • Operating margin of approximately 8.5% excluding TNT Express integration expenses;
  • EPS of $15.85 - $16.45 per diluted share before year-end mark to market (MTM) retirement plan accounting adjustments, up from the prior forecast of $15.65 - $16.25 per diluted share;
  • EPS of $17.20 - $17.80 per diluted share before year-end MTM retirement plan accounting adjustments and excluding TNT Express integration expenses, up from the prior forecast of $17.00 - $17.60 per diluted share;
  • Effective tax rate of approximately 25% prior to year-end MTM retirement plan accounting adjustments;
  • Capital spending of $5.6B.

Source: FDX – Q1 2019 Earnings Release – September 17, 2018

Credit Ratings

When I made the decision to retire early…that decision was final. After having experienced the pleasure of not having to work for a little over 2 years and to be able to pretty much do what I want to do, and when I want to do it, I see absolutely no reason to risk this by investing in speculative companies.

I have absolutely no concerns about the share price of great companies in which I own shares taking a hit. I just don’t want to invest in companies where the credit risk is beyond what I would consider reasonable. Being faced with a permanent impairment to a company’s share price, or a dividend cut because a company needs to conserve cash, is certainly not something I wish to experience. This is the reason why I like to look at a company’s credit ratings.

Investing in a company with a ‘non-investment grade speculative’ (or worse) rating description is not something that appeals to me regardless of how attractive a dividend yield may be. I pay heed to Moody’s and S&P Global’s ratings of a company….even though both entities are susceptible to making errors.

In the case of FDX, Moody’s rates it Baa2 and S&P Global rates it BBB. Both ratings are at the mid-point of the lower medium grade category and are stable. These ratings are acceptable from my perspective.

Valuation

When I wrote my June 20th article, FDX had recently reported $16.79 diluted EPS (GAAP) and $15.31 adjusted diluted EPS (non-GAAP) for FY2018. On the basis of the June 19th closing stock price of ~$258.50, FDX’s PE was ~15.4 (the 5 year average PE at the time was ~26.9) and its adjusted PE was ~16.89.

At the time of that article, the outlook for FY2019 was $15.65 - $16.25 in diluted EPS and $17 - $17.60 in adjusted diluted EPS. On the basis of a ~$258.50 stock price, FDX’s forward PE was ~15.9 - ~16.5 and the adjusted forward PE was ~14.7 - ~15.2.

Fast forward to the present day where FDX’s stock price is $247.32 as at the close of business on September 21st.

Adjusted EPS of $15.85 - $16.45 before year-end mark to market (MTM) retirement plan accounting adjustments is now expected thus giving us a forward PE range of ~15 - ~15.6. Adjusted EPS of $17.20 - $17.80 per diluted share before year-end MTM retirement plan accounting adjustments AND excluding TNT Express integration expenses now gives us a forward PE range of ~14 - ~14.4.

I view these levels as attractive to the point where FDX is approaching ‘undervalued’ territory.

Dividend, Dividend Yield, Stock Splits, and Dividend Payout Ratio

Details on FDX’s historical stock splits, stock dividends, and recent stock repurchase programs can be found here and its dividend history can be found here.

Investors have different goals and objectives and some predominantly, or exclusively, seek investments which will generate cashflow to support their needs. I, therefore, fully understand why some investors will shy away from FDX given that its dividend yield is ~1.05% ($0.65/quarter).

Having retired well before I can draw on any pension, I also like dividend and rental income. I, however, have come to appreciate that chasing dividend yield is fraught with risk. This is why I like to have a portfolio which consists of stocks which provide a steadily growing stream of dividend income and stocks which have lower dividend yields but provide me with the opportunity to generate more significant capital gains.

I recognize 20 years is a long time for some of us (especially if being of sound mind and body is a remote possibility if we’re still on this planet) but for much younger people than me, you may wish to look at this 20 year graph.

FDX - 20 Year Return vs S&P500 as at Sept 22 2018

Source: Tickertech

There are certainly no assurances that FDX will generate similar returns over the next 20 years as it has in the past 20 years but even if it only performs half as well….that’s not so bad.

NOTE: The variance between FDX’s return versus that of the S&P500 is certainly different depending on the timeframe selected so I encourage you to click on the link above so you can select the timeframe for which you wish to compare FDX’s performance to that of the S&P500.

On the dividend payout ratio front, the $2.60 annual dividend is extremely conservative when compared to FDX’s FY2018 diluted EPS of $16.79 and the adjusted diluted EPS forecast reflected in the Valuation section of this article. I view the risk of a dividend cut as being remote.

Final Thoughts

As noted earlier in this article I was foolish 19 years ago when I bought FDX shares and sold them not long after for a quick profit. That was an expensive lesson in not what to do if you want to become financially free.

I periodically read articles in which the company being analyzed is deemed to be an attractive investment yet the writer does not currently hold a position in said company and also has no intention of taking a position. While there may certainly be an extremely valid reason for this, I still view such a stance as a ‘head scratcher’. If I am prepared to recommend a company as an attractive investment opportunity, I am prepared to put my own money on the line.

I hold FDX shares in a retirement account for which I do not disclose details and also in the FFJ Portfolio. I also intend to acquire additional shares for the FFJ Portfolio within the next 72 hours. Had I not been on vacation in an area with sporadic internet access when FDX released its Q1 results I would have acquired shares on the date of the earnings release.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to charles@financialfreedomisajourney.com

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: Long FDX.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.

By |September 22nd, 2018|General Investing|Comments Off on FedEx – Adding to My Existing Position

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