FedEx (FDX) operates in virtually every country in the world. It transports mostly small parcels and envelopes by air and ground, mostly on a next-day-delivery basis, but also offers less urgent delivery and delivers larger packages and freight as well, explains Shawn Allen, contributing editor to Internet Wealth Builder.
FedEx is boosting its shipping rates, effective Jan. 7, by an average of 4.9% in its Express and Ground divisions and by an average of 5.9% in its freight division. FedEx has been imposing similar annual increases of about 4.9% for several years.
Adjusted earnings per share have risen by an average of 33% year-over-year for the past three quarters. This was driven by volume increases and rate hikes and also substantially boosted by the Trump income tax cuts. Revenues per share grew 12% year-over-year in the latest quarter and by an average of 10% in the three prior quarters.
Based on my analysis price of $227.89, the price to book value ratio is not low at 3.1. But this is probably well justified by the excellent return on equity of 25%. The trailing adjusted earnings p/e is attractively low at 14. The dividend yield is modest at 1.2%, despite healthy annual dividend increases.
Management is projecting relatively high earnings growth through 2020 as the company is anticipating substantial synergy savings as it continues to integrate its 2016 acquisition of TNT Express. This is over and above the increase due to the lower income taxes.
As a low-dividend, higher-growth stock, FedEx would not be considered to be particularly interest sensitive. The underlying negative aspects of rising interest rates, including higher borrowing costs, could be offset by the fact that higher rates are usually associated with stronger economic growth.
I calculate an intrinsic value of $190 per share, assuming a more conservative 5% annual growth, with a terminal p/e ratio of just 12 in five years.
If I assume a more optimistic 9% growth in earnings and a terminal p/e ratio of 15 then, based on a five-year holding period and using a required return of 7%, the intrinsic value would be $282. Overall, these value ratios would support a rating of "buy".
