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Following the completion of its TNT acquisition in May 2016, FedEx (FDX) realized the TNT business was severely under-invested. While the investment community did not respond kindly to this revelation, I considered this to be an opportunity to initiate a position through a retirement account for which I do not disclose details.
In my June 20, 2018 post, I touched upon the sale of FDX's pension obligations to Met Life. This was but one derisking activity FDX undertook to reduce the volatility of its pension liabilities and strengthen the balance sheet. I looked upon this as an opportunity to acquire additional shares.
In these September 2018 and December 2018 posts, I disclosed the purchase of additional FDX shares given that FDX had fallen out of favour with the investment community. My rationale for the purchases was that I envisioned an improvement in the company's performance within the next few years.
I further increased my exposure in June and September 2019 and disclosed the acquisition of additional shares here and here.
Throughout most of 2020 and 2021, I deemed FDX to be overvalued. I, therefore, limited increases in my exposure to automatic dividend reinvestment.
On April 8, 2022, FDX's valuation retraced to the point where I could acquire additional shares; I disclosed this purchase here.
Following my April post, FDX made a significant announcement and released Q4 and FY2022 results on June 23.
After my April 8 purchase, FDX's share price has increased by ~$40. Despite this runup, let's determine if FDX's valuation is sufficiently attractive to warrant the purchase of additional shares.
Financials
FDX's Q4 FY2022 Financial and Operating Statistics are accessible here.
Q4 and FY2022 Results
On June 23, 2022, FDX released Q4 and FY2022 results. The FY2022 Form 10-K is not yet available.
Despite an increasingly challenging global backdrop, FDX finished FY2022 with its highest ever revenue of $93.5B and adjusted operating income of $6.9B, both up 11% YoY.
FDX has worked through many network inefficiencies caused by labour shortages. Although wage rates are higher than last year, they are stabilizing. Nevertheless, COVID-related conditions slowed global recovery and pressured second-half performance.
Free Cash Flow (FCF)
Looking at FDX's Condensed Consolidated Statements of Cash Flows (page 19 of 23) in the Q4 2022 Form 8-K, we see FCF of ~$3.1B ($9.832B in net cash provided by operating activities minus $6.763B in CAPEX). If we add $0.5B in voluntary contributions to tax-qualified U.S. domestic pension plans, FDX's FY2022 adjusted FCF is $3.569B.
As noted in my previous posts, FDX's business is highly capital intensive. Capital expenditures (CAPEX) during the FY2011 - FY2022 timeframe (in billions rounded) is $3, $4, $3, $4, $4, $5, $5, $6, $5, $6, $6 and $7.
FCF during the same timeframe amounted to: $0.607B, $0.828B, $1.313B, $0.731B, $1.019B, $0.89B, ($0.186B), ($0.989B), $0.123B, ($0.771B), $4.251B, and $3.069B.
FY2023 Outlook
Management expects the macroeconomic risks in the U.S. and globally to continue to put stress on supply chains and trade. Expectations are for consumers to tilt their spending toward services from goods. In addition, FDX expects more consumers to return to stores which will place pressure on its B2C (business to consumer) volumes.
While May's industrial activity has been solid, June's recent flash Purchasing Managers Index (PMI) reflects a sharp decline.
FDX's international businesses continue to navigate a dynamic environment. Global trade growth has slowed from disruptions related to lockdowns in China and the conflict in Ukraine. This has negatively impacted the flow of goods and has resulted in a reduction in international export volumes.
FDX's volume forecast has low single-digit volume growth but it has prepared plans to manage through a slowing economic environment if required. Cost and revenue actions are to be taken to mitigate the impact of further economic softening. An example of this is the close monitoring of inflation and fuel prices; the fuel surcharge is adjusted weekly in response to market conditions.
FDX is unable to forecast the FYE2023 year-end mark-to-market (MTM) retirement plans accounting adjustment. It is, therefore, unable to provide FY2023 EPS or an effective tax rate outlook on a GAAP basis.
The following, however, is provided:
- Diluted EPS of $22.45 - $24.45 before the MTM retirement plans accounting adjustment and costs related to business optimization initiatives;
- Diluted EPS of $22.50 - $24.50 before the MTM retirement plans accounting adjustments and costs related to business optimization initiatives, and excluding estimated costs associated with business realignment activities;
- Estimated tax rate of ~24% before the MTM retirement plans accounting adjustments and costs related to business optimization initiatives; and
- Capital spending of $6.8B. Priority will be given to investments to improve efficiency, including fleet and facility modernization, and increased automation. The focus is on lowering capital intensity while investing in strategic initiatives to improve returns.
Management's forecasts assume continued growth in U.S. industrial production and global trade, a continued gradual improvement in labour availability, no new COVID-19 related business restrictions, current fuel price expectations and no additional adverse geopolitical developments.
The FY2023 outlook includes ~$0.45B non-cash pension headwind through the lower asset returns realized in FY2022. This expense will be recognized evenly over the year.
FDX's retirement plans operating expenses will be relatively flat as lower pension expenses will be offset by higher 401(k) expenses. NOTE: The primary US pension plans were closed to new entrants beginning in 2020 and a new 401(k) plan was introduced with a higher company match in January 2022.
Risk Assessment
FDX is highly capital intensive. As a result, it is not surprising to see a significant amount of debt on its Balance Sheet (until FDX's FY2022 Form 10-K is released, refer to page 95 of 368 in FDX's FY2021 Form 10-K). We see from this schedule of long-term debt that obligations are well staggered and the weighted average interest rate on long-term debt is ~3.5%.
FDX's domestic senior unsecured long-term debt ratings remain unchanged from the time of my prior reviews. They are:
- Moody's: Baa2 - last reviewed April 16, 2021.
- S&P Global: BBB - last reviewed August 20, 2021.
Both ratings are the middle tier of the 'lower medium grade' category. At this level, FDX has an ADEQUATE capacity to meet its financial commitments. Adverse economic conditions or changing circumstances, however, are more likely to lead to a weakened capacity for it to meet its financial commitments.
These ratings are satisfactory for my prudent investor profile.
Dividends and Dividend Yield
In my United Parcel Service (UPS), FDX's larger competitor, guest post at Dividend Power I touch upon the ~50% increase in the quarterly dividend ($1.02 to $1.52). Not to be outdone, FDX is increasing its quarterly dividend by ~53% ($0.75 to $1.15) effective with the July 11, 2022 dividend.
Despite this dividend increase, FDX's GAAP and non-GAAP dividend payout ratios are conservative. I envision little risk of a dividend freeze/cut in FY2023.
Looking at FDX's dividend history, we see that FDX froze its quarterly dividend at $0.65 in FY2020 and FY2021. A temporary covenant within FDX's May 27, 2020 Credit Agreement restricted FDX from repurchasing any shares or increasing the $0.65 quarterly dividend payable per share of common stock between May 27, 2020 and May 31, 2021. Effective March 16, 2021, this temporary covenant was no longer contained in FDX's amended and restated $2.0B five-year credit agreement and $1.5B 364-day credit agreement.
When I wrote my April 9, 2022 post, FDX's $0.75 quarterly dividend yielded ~1.5% based on the current ~$201.50 share price. Despite the surge in FDX's share price to ~$243, the new $1.15 quarterly dividend yields ~1.9%.
Historically, the dividend component of FDX's overall total investment return has been somewhat insignificant. As much as the recent dividend increase might entice investors who heavily focus on dividend metrics, I urge caution. Consistent dividend increases of the magnitude recently announced are highly unlikely.
The weighted average number of issued and outstanding shares in FY2010 - FY2022 (in millions) was 314, 317, 317, 317, 310, 287, 279, 270, 272, 265, 262, 268, and 266. The weighted average number of issued and outstanding shares in Q4 2022, however, was ~261.
Further details regarding FDX's share repurchases (including the accelerated share repurchase ('ASR') agreement) are found in my April 9, 2022 post.
Looking at the condensed consolidated statement of Cash Flows in the June 23 Form 8-K, we see that FDX repurchased ~$2.25B of treasury stock in FY2022.
As of May 31, 2022, $4.1B remained under the existing share repurchase authorization. FDX expects to repurchase $1.5B of common stock during the first half of FY2023.
Valuation
FDX's FY2011 - FY2022 diluted PE levels are 15.18, 14.72, 27.81, 22.01, 37.81, 27.02, 22.98, 8.79, 432.03, 28.25, 14.24 and ~13.
When I wrote my April 9, 2022 post, FDX had generated $12.17 in GAAP diluted EPS in the first 3 quarters of FY2022. I estimated FDX would generate $4.10 of diluted EPS in Q4, thus leading to ~$16.27 in estimated FY2022 diluted EPS. Using the current ~$201.50 share price, the forward diluted PE was ~12.4.
We now see that FDX generated $14.33 in FY2022. Shares are now trading at ~$243 so the trailing PE is ~17.
At the time of my March 25, 2021 post, the online brokerage platforms I use reflected FY2021 adjusted mean, low/high estimates of $17.91, $16.85 - $18.25 from 23 brokers. Using the ~$272 share price at the time of that post, FDX's forward adjusted diluted PE range was ~15 - ~16.1 with a mean of ~15.2.
When I wrote my April 9, 2022 post, FDX shares were trading at ~$201.50. Using this price and the following adjusted diluted PE levels, FDX's valuation was:
- FY2022 - 24 brokers - mean of $20.59 and low/high of $19.75 - $21.07. Using the mean estimate, the forward adjusted diluted PE is ~9.8.
- FY2023 - 27 brokers - mean of $22.45 and low/high of $18.83 - $24. Using the mean estimate, the forward adjusted diluted PE is ~9.
- FY2024 - 9 brokers - mean of $24.55 and low/high of $21.17 - $26.40. Using the mean estimate, the forward adjusted diluted PE is ~8.2.
Management's FY2023 outlook currently calls for the following:
- EPS of $22.45 - $24.45 before the MTM retirement plans accounting adjustments and costs related to business optimization initiatives.
- EPS of $22.50 - $24.50 before the MTM retirement plans accounting adjustments and costs related to business optimization initiatives and excluding estimated costs associated with business realignment activities.
If we use a range of $22.45 - $24.50 and a $23.48 mid-point and the current ~$243 share price, the forward adjusted diluted PE range is ~10 - ~10.8 with a mean of ~10.3.
The brokers which cover FDX are currently lowering their earnings estimates given the June 23 release of FY2022 results and FY2023 outlook. For now, however, FDX's valuation using current adjusted diluted earnings estimates are:
- FY2023 - 28 brokers - mean of $22.39 and low/high of $20.50 - $24. Using the mean estimate, the forward adjusted diluted PE is ~10.9.
- FY2024 - 12 brokers - mean of $24.68 and low/high of $21.17 - $26.85. Using the mean estimate, the forward adjusted diluted PE is ~9.8.
- FY2025 - 2 brokers - mean of $28.73 and low/high of $25.55 - $31.90. Using the mean estimate, the forward adjusted diluted PE is ~8.5.
I place no reliance on FY2025 guidance since only 2 brokers have provided their estimates.
Final Thoughts
I hold FDX shares in a 'Side' account within the FFJ Portfolio and in a retirement account for which I do not disclose details. My decision to not add to my FedEx exposure despite its attractive valuation is because I am deploying my liquidity toward the purchase of shares in high-quality companies that have temporarily fallen out of favour. The ~$40 surge in FDX's share price after my April 8 purchase excludes FDX from the list of 'fallen out of favour' companies. Having said this, FDX's valuation is reasonable if it happens to be on your 'shopping list'.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long FDX and UPS.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
