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ModernGraham Valuation: Fedex Corp (FDX)

moneyCompany Profile (obtained from Google Finance): FedEx Corporation (FedEx) is a holding company. The Company provides a portfolio of transportation, e-commerce and business services under the FedEx brand. Federal Express Corporation (FedEx Express) is an express transportation company, offering time-certain delivery within one to three business days and serving markets. FedEx Ground Package System, Inc. (FedEx Ground) is a provider of small-package ground delivery service. FedEx Freight Inc (FedEx Freight) is a provider of less-than-truckload (LTL) freight services. FedEx Corporate Services, Inc. (FedEx Services) provides the Company’s other companies with sales, marketing, information technology, communications and back-office support. In June 2012, the Company acquired polish courier company Opek Sp. z o.o. In July 2012, the Company acquired TATEX. In July 2012, the Company’s, FedEx Express business unit, acquired Rapidao Cometa, a transportation and logistics company.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $174.52
MG Opinion Fairly Valued
Value Based on 3% Growth $83.17
Value Based on 0% Growth $48.76
Market Implied Growth Rate 7.93%
Net Current Asset Value (NCAV) -$14.23
PEmg 24.36
Current Ratio 2.08
PB Ratio 2.52

Balance Sheet – 8/31/2013 

Current Assets $11,493,000,000
Current Liabilities $5,523,000,000
Total Debt $2,739,000,000
Total Assets $33,673,000,000
Intangible Assets $2,712,000,000
Total Liabilities $16,018,000,000
Outstanding Shares 318,000,000

Earnings Per Share

2014 (estimate) $6.84
2013 $4.92
2012 $6.41
2011 $4.58
2010 $3.77
2009 $0.31
2008 $3.61
2007 $6.48
2006 $5.83
2005 $4.72
2004 $2.76
2003 $2.74

Earnings Per Share – Modern Graham 

2014 (estimate) $5.74
2013 $4.79
2012 $4.39
2011 $3.51
2010 $3.31
2009 $3.45

Conclusion:

Fedex Corporation is a company whose earnings have been a little unstable over the ten year historical period we’ve reviewed.  The company showed great growth during the first half of the period, then had a strong pull back from $6.48 in EPS for 2007 to $0.31 for 2009.  This drop can probably be attributed significantly to the recession, but it is noteworthy nonetheless.  In addition, the earnings issue has affected the company’s standing with Defensive Investors, as it has led the company to fail the Defensive Investor’s earnings growth requirement.  The company also fails the Defensive Investors requirements of low PEmg and PB ratios, and hence is not suitable for the Defensive Investor.  However, Enterprising Investors are more willing to take on risk than their Defensive Investor counterparts, and Fedex passes the Enterprising Investor’s requirements with flying colors.  From the valuation side of things, the market currently implies a growth rate of 7.93%, and that growth is supported by the recent trend in the earnings after the company has grown EPSmg (normalized earnings) from $3.45 in 2009 to an estimated $5.74 for 2014.  As a result, the company appears to be fairly valued and Enterprising Investors should feel comfortable proceeding with further research to determine if it is suitable for their individual portfolios.

What do you think?  Do you agree that Fedex Corporation is fairly valued?  Is the company suitable only for Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Fedex Corporation (FDX) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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