Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Undervalued Companies for the EnterprisingÂ Investor.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Fedex Corp (FDX)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â FedEx Corporation (FedEx) is a holding company. The Company provides a portfolio of transportation, e-commerce and business services under the FedEx brand. The Company operates in four segments: FedEx Express, FedEx Ground, FedEx Freight and FedEx Services. 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 Ground provides day-certain service to every business address in the United States and Canada. 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 May 2014, the Company acquired Supaswift businesses in South Africa and six other countries.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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 -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$82.06|
|Value Based on 0% Growth||$48.10|
|Market Implied Growth Rate||8.91%|
|Net Current Asset Value (NCAV)||-$24.28|
Balance Sheet – 2/28/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Fedex CorpÂ qualifies for the Enterprising Investor but not the Defensive Investor. Â The Defensive Investor has concerns with the company’s low current ratio, insufficient earnings growth over the last ten years, and high PEmg and PB ratios. Â The Enterprising Investor does not have many initial concerns with the company, though, as it passes all of the investor type’s requirements. Â As a result, Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review ofÂ ModernGraham’s valuation of United Parcel Service (UPS). Â From a valuation side of things, the company appears to be fairlyÂ valued after growing its EPSmg (normalized earnings) from $3.31 in 2010 to an estimated $5.66 for 2014. Â This level of demonstrated growthÂ supportsÂ the market’s implied estimate of 8.91% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value that is within a margin of safety relative to the current price.
Be sure to review the previousÂ ModernGraham Valuations of Fedex Corp (FDX)!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Fedex Corp (FDX)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Fedex Corp (FDX)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from wikipedia; this article is not affiliated with the company in any manner.