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FedEx (FDX) has seen its share price drop ~31% from its 52 week high.

FedEx Express’s CEO will retire effective Dec. 31, 2018, after just two years at the helm with this ‘retirement’ announcement coming in the midst of the crucial holiday season.

While Q2 2019 results will be released December 18th and we could see a downward revision in FY2019 projections, I can not recollect when FDX shares were this attractively valued.

I also envision FDX results will improve significantly once its completes its major CAPEX program ($5.6B in FY2019) and TNT integration.

I have decided to acquire additional shares for the 'Side Accounts' within the FFJ Portfolio. The average cost of my overall FDX holdings is now roughly the same as the current market price.

 

Summary

  • FedEx Express’s CEO will retire effective Dec. 31, 2018, after just two years at the helm with this ‘retirement’ announcement coming in the midst of the crucial holiday season.
  • FDX shares have retraced ~31% from the 52 week high and forward valuation, based on the FY2019 Outlook provided in September, has not been this attractive in a long time.
  • I am of the opinion ‘Tariff Man’ will not be around much longer. Once he is gone I envision an improvement in global trade which will benefit FDX.
  • Once FDX’s major CAPEX program and TNT integration have been completed I anticipate an improvement in financial results.
  • Investors should consider that even if FDX’s dividend growth rate were slashed in half, the growth would be well above the rate of inflation.
  • I view FDX has having hit a ‘speed bump’ and have acquired additional shares for the ‘Side Accounts’ within the FFJ Portfolio.

Introduction

A quick ‘FedEx’ search on the ‘Archives’ section of my site will reveal that I have written a few FedEx (NYSE: FDX) articles.

Before reading this article I encourage you to read my September 22nd article in which I explained why I thought shares were approaching ‘undervalued’ territory; I subsequently I acquired a few additional shares at ~$243.

Subsequent to that article, FDX’s share price has pulled back ~$53/share! This has resulted in my overall average cost being almost the same as the current market price.

Investors who have just begun investing in equities within the past few years might not be accustomed to seeing equity prices drop to the extent FDX’s share price has dropped. Looking at FDX’s stock chart for the past year, a relatively new investor in FDX might be wondering what’s so great about FDX and whether the share price can drop further.

I can appreciate this level of concern especially since:

  • it was recently announced that FedEx Express’s CEO will retire effective Dec. 31, 2018, after just two years at the helm;
  • the ‘retirement’ announcement came in the midst of the crucial holiday season;
  • FDX’s Q2 results will be released December 18th and who knows what to expect.

I have no idea what to expect from FDX’s Q2 results but I envision results have been negatively impacted by the current ‘trade spats’.

I also noted in my September 22nd article that FDX has been investing heavily to upgrade its facilities in its key divisions.

‘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.’

Given the heavy CAPEX, this is bound to have a negative impact on Free Cash Flow (FCF). At some stage in the not too distant future, however, these CAPEX levels are going to ease back and negative FCF levels recorded over the past couple of years (-$0.186B in FY2017 and -$0.989B in FY2018) will very likely return to positive territory.

This is a crucial time of the year for FDX (and its major competitors such as United Parcel Service (NYSE: UPS) and it is doing its utmost to meet the surge in demand during this year's holiday season. The challenge with this time of the year is that FDX incurs significantly higher costs in the form of the bonuses paid to pilots for keeping flights operational.

Another headwind FDX faces is that a task force appointed by the self-described ‘Tariff Man’ has suggested that the United States Postal Service (‘USPS’) raise the price for shipping packages. Should rate increases be instituted, it is possible online retailers will be negatively impacted although I do not see any long-term reversal in the trend from in-store shopping to on-line shopping. FDX and UPS would feel the impact from any increase in postal rates since they often use USPS for the last mile delivery.

FY2019 Guidance

In my September 22nd article I provided the following projections found in FDX’s September 17, 2018 Earnings Release.

  • 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

Valuation

When I wrote my June 20th 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.

When I wrote my September 21st article, FDX’s stock price was $247.32. Adjusted EPS of $15.85 - $16.45 before year-end mark to market (MTM) retirement plan accounting adjustments was 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 gave us a forward PE range of ~14 - ~14.4.

If I use Adjusted EPS of $15.85 - $16.45 before year-end mark to market (MTM) retirement plan accounting adjustments and the current ~$190 stock price as at the close of business on December 11th we get a forward PE range of ~11.55 - ~12.

If I use Adjusted EPS of $17.20 - $17.80 before year-end MTM retirement plan accounting adjustments AND excluding TNT Express integration expenses and the current ~$190 stock price, we get a forward PE range of ~10.68 - ~11.05.

I can’t remember when FDX was valued at such low levels!

Let’s presume the investment community knows something I don’t and has knocked the stuffing out of FDX’s stock price because it thinks adjusted EPS levels for FY2019 will be revised lower. Even if the forward PE and adjusted PE levels increase to the ~14 - ~16 range, I still think this is a reasonable valuation for a company of FDX’s quality.

Credit Ratings

In my most recent General Mills article (NYSE: GIS) I made reference to GIS’s Baa2 rating from Moody’s and its BBB rating from S&P Global. I indicated that I hold shares in other companies with identical ratings; FDX is such a company.

In the case of GIS, both ratings agencies have downgraded GIS within the past year. In the case of FDX, the ratings have been stable for many years.

Not only is a company’s credit rating important to me but so is the trend. I don’t like the trend for GIS hence I view its ratings as a negative. In the case of FDX, stable with no indication the ratings are under review is satisfactory for my purposes.

Dividend and Dividend Yield

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.

I certainly do not expect FDX to appeal to dividend yield hungry investors but suggest investors keep in mind FDX’s dividend growth.

I think it might be a stretch to think that FDX can continue to increase its dividend at the growth rate evidenced in recent years. Suppose, however, that dividend growth were to be slashed from the growth levels of 2014 – 2018 to, perhaps, 10%. That growth outpaces the rate of inflation.

In the case of GIS, there has been no change in the $0.49/quarter dividend since August 2017 and no growth is expected until after FY2020. The dividend income from GIS has not kept pace with the rate of inflation.

Investors who rely on dividend income to partially support their standard of living during retirement, for example, might want to run the numbers to see whether high dividend growth suits them better than high yield with no growth / limited growth.

Final Thoughts

The recent announcement, in the midst of the crucial holiday season, that FedEx Express’s CEO will retire effective Dec. 31, 2018 after just two years at the helm has certainly raised some concern that something is awry at FDX. This has resulted in FDX’s share price getting slammed.

I view this as a ‘speed bump’ and I do not think that FDX’s business has been permanently impaired.

I fully recognize that the investment community could get a surprise when Q2 results are released December 18th but based on FDX’s history it is not in the business of surprising investors. We may see some weaker than expected results which might be attributed to some of the political turmoil but I think Tariff Man’s days are limited and global trade will be stronger once he is gone; this would bode well for FDX.

I cannot recollect FDX being valued at such a low level in recent history. As a result, even though FY2019 projections could be revised downward come the release of Q2 results on December 18th, I think the current valuation is sufficiently attractive that I decided to acquire more shares today.

I hope you enjoyed this post and I wish you much success on your journey to financial freedom.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].

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: I am long FDX and UPS.

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.