FedEx Corp. (FDX) shares have underperformed over the past quarter, falling 39% compared to a 6% drop for the S&P 500, notes John Eade, an analyst with Argus Research, a leading independent Wall Street research firm.
The share weakness has largely been linked to an earnings warning FedEx delivered to the market on September 15. In the announcement, the company commented that fiscal 1Q results were adversely impacted by global volume softness
This large-cap blue-chip industrial company has benefited over the past few years from solid growth in the consumer sector, and especially from growth in e-commerce. But other trends and factors have emerged, ranging from trade wars to COVID-19 to inflationary pressures that have constrained FedEx’s growth.
In recent months, the company has undergone a management transition and appears to be placing greater priority on shareholder returns — with the help of an activist investor.
The balance sheet remains solid, and the new management team recently signaled confidence in its outlook with a 53% dividend hike as well as an expanded share repurchase program.
Despite these positive factors, the share price is near five-year lows in the wake of a disappointing earnings announcement that raised questions about the credibility of the new management team.
We think the FDX shares currently offer value, particularly if management can get back on track with its five-year plan. Our revised target price of $175 implies a multiple of 12-times our FY24 EPS estimate, below the midpoint of the historical P/E range, as earnings growth resumes.
As a result of the preliminary first-quarter financial performance and expectations for a continued volatile operating environment, FedEx withdrew its fiscal year 2023 earnings forecast provided on June 23, 2022.
Investors in FedEx face numerous risks. The shares have been exposed to trade and tariff threats, and global economic volatility caused by the coronavirus. The company’s earnings are susceptible to swings in fuel costs. FedEx is also sensitive to changes in overall economic growth in the U.S. and abroad.
We think that FDX shares are attractively valued at current prices near $150, near the bottom of their 52-week range of $140-$267. On a technical basis, the shares have been in a bearish pattern of lower highs and lower lows since hitting a 52-week high in May 2021.
To value the stock on a fundamental basis, we use peer and historical multiple comparisons, as well as a dividend discount model. FDX shares are trading at 10-times our FY24 EPS estimate, at the bottom of the historical range of 9-20.
On price/sales, the shares are trading at a multiple of 0.4, at the low end of the five-year range of 0.4-1.0. The yield of about 3.1% is above the midpoint of the five-year range. In our view, the shares are trading at attractive valuation level.
