Good Day Everyone
Today is the 2nd edition of the “Stock of the Month” and today I’ll be taking a request from a friend of mine and taking a look at FedEx. To date, I haven’t looked at anything that trades in the US, but since we have such easy access to purchase American equities in Canada, I don’t mind doing so.
Let’s start with the basics:
Here is a snapshot of the stock from Google Finance from this morning at 10:27 am.
- YTD Performance is approximately +17.5%
- Dividend Payout Ratio approximately 24%
So there are the basic stock facts. As you can see, although it does pay a dividend, the yield is quite low but the payout ratio is also low, so there is plenty of room for future growth. Ultimately, this is not the typical dividend stock I look at, but the stock price has performed quite well year to date, more than enough to negate the lack of solid dividend. Now let’s get into the details and see if there is potential for more gains in the stock.
Exhibit 1: The Business
In order to get a better understanding of FedEx as a whole, we need to take a look at their different operating segments so I’ve pasted them for you below. These were clipped directly from FedEx quarterly and annual reports.
I’ve also attached their revenues and expenses per segment. As you can see, Express and Ground make up a lion’s share of the revenue, so I’ll focus our attention in these areas in the analysis.
Exhibit 2: Online Retail
The biggest positive trend going for all shipping companies is the explosive growth of online retail. I’ve posted a chart below showing the projected future growth of online retail as a whole, and as a percentage of overall retail. Online retail is expected to grow by over 30% by 2018. Online sales as a percentage or overall retail is also expected to increase as more people are able to access the internet, and are more comfortable shopping online. This will mean more demand for shipping and logistics services which is strongly positive for companies like FedEx. I also included a list of the top 10 countries who shop online the most relative to overall retail. European countries makes up most of the spots on the top 10 with 5 countries. This is something to keep in mind for exhibit 3.
Exhibit 3: Growth Opportunities
FedEx recently acquired a shipping company called TNT Express. I posted a couple of management comments regarding the merger. These were also taken from the company’s quarterly and annual reports.
My takeaway from this is that FedEx is greatly expanding their ground capabilities in Europe to take advantage of the trends I discussed in Exhibit 2 that showed Europe being more accepting of online retail. This acquisition also expands on the main core of their business which is express shipping. While the acquisition was very large, I don’t see any reason to believe that there will be any major issues with integrating TNT Express into their own operations.
Exhibit 4: Margins
Below are 4 charts from FedEx’s quarterly report of their Revenue per Package – Yield. Again, we’re only going to focus on Express, and Ground since they make up a large majority of the business. US Domestic Express and FedEx ground has performed very well over the last 3 quarters, while International Express has been largely flat. I expect the TNT Express implementation will contribute positively to the margins of this business line in future quarters as they gain economies of scale.
Exhibit 5: Technical Analysis
Those who have followed this blog since the beginning know that I’m not a day trader. I also don’t follow technical analysis very closely. However, when I laid eyes on the FedEx chart, I couldn’t help but notice an obvious inverse head and shoulders pattern forming. Before I go into it, I’ll post below the definition of that as explained by Investopedia:
Now, I’m going to paste the FedEx stock chart. You will see the exact same pattern applies. The first shoulder is formed around $145, the head is around $126, and the second shoulder is right at $150, which is higher than the left shoulder. Recently it has risen above the neckline, and from a technical analysis point of view, it is poised to break out upwards from here. Again, I’m not a technical analyst, but the similarities are undeniable.
Exhibit 6: Risks
As good as I’ve made FedEx sound so far, no investment is without risk. I’ll highlight a few of the main ones below:
- Market Risk – A large portion of a stock’s performance is based on the behavior of the market as a whole. As such, FedEx shares subject to the same market risk as any other stock traded publicly.
- Economic Risk – As the economy goes, so does disposable income. If people can’t afford to shop online anymore because of a 2009 style stock market crash, then FedEx will be negatively impacted.
- Currency Risk – Because FedEx operates in so many countries, they are subject to foreign currency risk. If the US Dollar were to strengthen dramatically, their global profits will convert to less US Dollars, causing a decline in their overall profitability.
- Terrorism – Sad to have to bring this up in 2016, but because FedEx operates in so many airports worldwide, any act of terrorism can hinder/destroy their ability to operate in certain places.
Conclusion: So, after this long set of analysis from different angles, do I think FedEx is a company worth investing in? Absolutely I do! Although the state of the economy worldwide is questionable depending on who you ask, it is an undeniable fact that the global trend in retail is online. FedEx is poised to take advantage of this fact, and their acquisition of TNT Express only boosts their ability to serve some of the largest markets in the online retail segment. Management has shown ability to grow margins in their largest business segments while also increasing their dividend payout by 60%. They are a tremendously well-run company with a long history of delivering (pun intended), and if you have a 5 + year horizon, I expect FedEx stock to perform very well that time frame.
Disclosure: I do not have a position in FedEx (FDX) and any opinions I have on the stock are mine alone. Please ensure this investment meets your risk tolerance before investing.
Bottom Line: So that was FedEx in a nutshell. I hope you guys got value from my analysis and as always, if you have a stock you’d like me to take a look at, please feel free to let me know via Twitter, comment section or email. I will also be announcing soon what I will be doing with my subscription section in the blog, so feel free to subscribe before then. Talk to you soon.