FedEx (FDX) shares are under pressure from slower growth in China and a stronger dollar, but don’t let a simplistic macroeconomic bear case against FDX stock blind you to its value proposition.
After all, a decelerating Chinese economy is hardly a new development. FDX has been adjusting to it for years with increasing success, and investors can expect more of the same in the FedEx earnings report Wednesday.
Sluggish global economic growth has been a fact of life for FDX, United Parcel Service (UPS) and every other package-delivery company since the financial crisis. Heck, China’s economy hasn’t registered an annual growth rate of at least 8% in almost three years.
With more companies literally choosing to take the (lower margin) slow boat from China, FDX has had to rely on restructuring efforts to boost earnings per share. So far, it has been working.
For example, FDX retired a number of older, less fuel-efficient planes from its fleet and changed the way it charges for parcel delivery.
In an even more dramatic move, FedEx shifted its capital focus to building up its domestic ground network at the expense of express shipping, because ground is higher margin and less capital intensive. Ground is producing outsized growth relative to express, which helps profitability and cash flow.
Acquisitions like its $4.8 billion deal for Dutch shipper TNT Express (TNTEY) will also help FDX leverage its costs. Add it all up, and FDX is enjoying solid expansion in operating margins.
FDX Stock on Sale
Margin growth and a stock-buyback program have allowed earnings per share to grow at a faster rate than any top-line gains. Investors can expect more of the same in the most recent quarter.
FedEx fiscal first-quarter earnings are forecast to grow to $2.45 a share from $2.12 a year ago, according to a survey of analysts by Thomson Reuters. Revenue is projected to increase a solid 5.3% to $12.3 billion.
More importantly for FDX stock’s shorter-term prospects, earnings-per-share growth is expected to remain strong. Wall Street analysts figure EPS will expand 21% this fiscal year and 15% next year.
Indeed, FDX has a long-term growth forecast of more than 15%.
At the same time, sour sentiment on FDX stock amid a Chinese slowdown has the market undervaluing shares. Heck, FDX stock trades at just 12 times forward earnings.
That price-to-earnings multiple is cheaper than the broader market even though FDX has better growth prospects than the S&P 500.
It also represents a significant discount to FDX stock’s own five-year average P/E of 15.
That makes FDX stock look like a bargain even if you leave the secular growth of e-commerce out of the equation. Let’s not forget that FDX’s fortunes are directly tied to the inexorable expansion of online shopping — thanks, Amazon (AMZN)!
Bottom Line
As a global economic bellwether, FedEx earnings are unlikely to tell us anything new. China is slowing down, the U.S. is picking up and Europe is all about the stronger dollar hurting revenue.
On a company-specific level, however, investors can expect further improvements in margin expansion and cash flow. That’s the story here, and it bodes well for FedEx stock.
It might not happen this year, but with shares trading below their true worth despite better fundamentals, FDX will outperform the S&P 500 eventually.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
