Should You Buy FedEx Stock At $250?

FedEx stock (NYSE: FDX) lost more than 30% – dropping from $155 at the beginning of the year to below $112 in late March – then spiked 127% to around $254 now. That means it’s now 64% higher than where it started the year!

Why? The Covid-19 outbreak meant restrictions of movement and people flocked to e-commerce platforms for shopping, which greatly benefited FedEx’s Ground residential delivery business. And now with economies gradually opening up, the overall demand for parcel delivery has increased. Furthermore, the multi-billion dollar Fed stimulus provided a floor, and the market recovery along with the FDX stock rebound owes much to that.

But is this all there is to the story?

Not quite. Trefis estimates FedEx’s valuation to be around $275 per share – about 8% above the current market price – based on two upcoming triggers explained below.

The first trigger we see is cost-cutting efforts helping FedEx’s Net Margins to increase from 3.6% on an adjusted basis in fiscal 2020 to 5.5% in fiscal 2022. FedEx’s margins were stable at around the 6% mark between fiscal 2016 and fiscal 2019, but declined to 3.6% in fiscal 2020, owing to the impact of Covid-19, with higher operating costs and expansion of Ground segment services. So where is this sudden margin expansion coming from?

Firstly, FedEx has seen a significant improvement in residential deliveries of late. Residential volume accounted for 72% of total U.S. domestic volume in Q4 fiscal 2020, compared to 56% figure in the prior year quarter. Usually, business deliveries are more profitable compared to residential deliveries. But despite the growth in residential deliveries, FedEx managed to grow its earnings, implying an expansion of margins on the residential side as well. And now with economies gradually opening up, the higher margin business deliveries will expand, further boosting the margins.

Secondly, the investments made to expand the offerings in the Ground segment in fiscal 2020, will likely start paying off for FedEx now. For instance, FedEx has expanded seven-day residential delivery coverage to more than 95% of the U.S. population. It is also working toward modernization of linehaul networks for better productivity. Finally, lower fuel costs will also bolster the overall margins in the near term. Overall, we believe FedEx is poised to see strong margin expansion over the coming years.

The second trigger is an improved trajectory for FedEx’s Revenues over the second half of the year. We expect the company to report $75.2 billion in revenues for fiscal 2021 – 8.6% higher than the figure for fiscal 2020. With many countries gradually opening up the economy now, the business deliveries are expected to rise, while demand for residential deliveries will likely remain high, with people preferring to order from home in the near term. Combine the two triggers and we see the company reporting an EPS of $15.67 for fiscal 2021, compared to $9.56 in fiscal 2020, on an adjusted basis.

Finally, how much should the market pay per dollar of FedEx’s earnings? Well, to earn close to $15 per year from a bank, you’d have to deposit about $1,500 in a savings account today, so about 100x the desired earnings, assuming the interest rate to be 1%. At FedEx’s current share price of $253, we are talking about a P/E multiple of just over 16x. And we think a figure closer to 18x will be appropriate.

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