With FedEx Corporation (NYSE:FDX) stock trading about flat over the past twelve months, against 5% gains for the S&P 500 Index, FDX hasn’t delivered the goods investors expected. FDX stock underperformed, thanks to a challenged industry with muddied prospects as global growth has weakened both the air delivery and freight industry. But that’s all about to change.
Macy’s Inc (NYSE:M) announced Thursday it will close 100 stores, or about 15% of its 728 locations. Without question, this is a sound move for the embattled retailer since it will help Macy’s become not only leaner, but — at the same time — allow it to focus on the e-commerce side of the business to help lessen the damage done by Amazon.com, Inc. (NASDAQ:AMZN).
While Macy’s received a standing ovation with 14% rise in its stock price, the market ignored what this decision could mean for FedEx stock. The extinction path of the brick-and-mortar retail model is accelerating. Wal-Mart Stores, Inc.’s (NYSE:WMT) acquisition of Jet.com earlier this week was the latest confirmation that e-commerce is the new growth driver.
I expect the likes of J.C. Penney Company Inc (NYSE:JCP) and Kohl’s Corporation (NYSE:KSS) to mimic Macy’s decision to rely less on shopping malls and more on higher-margin omni-channel models. And as this shift in retail unfolds, it raises FedEx’s growth capabilities, which in turn makes FDX stock a must-own equity. Why FedEx stock?
Aside from the fact that global e-commerce is already growing at double-digit rates, FedEx recently closed on its $4.8 billion acquisition of TNT Express, giving it more scale across the globe, especially in Europe. Plus, adding TNT’s capabilities to will help FedEx distance itself from its competitors since it will have more pricing power from its broaden network. And this should have a boosting effect on FedEx stock, especially from an operating margin perspective.
FedEx’s ongoing expansion of the Ground network and its Express fleet’s planned aircraft deliveries is another reason the company is more adequately prepared to capitalize on the e-commerce boom. Thanks to the dominance of Amazon, retailers have no choice but to shutter low-performing stores, meaning more investments in direct-to-consumer.
Bottom Line on FDX Stock
FedEx is projected to grow earnings at an average rate of about 11% annually for the next five years, which now seems too low. Not to mention, FDX stock is priced at just 12 time fiscal 2017 estimates of $13.47 per share, compared with a forward price-earnings ratio of 17 for the S&P 500.
This means not only is FDX stock erroneously undervalued, the market is also ignoring the growth potential that exist from the ongoing shift in the retail space. Not to mention the boost FDX stock will get from greater efficiencies from TNT Express.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
