FedEx (FDX) releases third quarter 2022 financial results after the closing bell on Thursday, March 17, 2022, with consensus expectations (per IBES by Refinitiv) forecasting $4.64 EPS on $23.44 billion in revenue for an expected annual growth of 34% and 9% respectively.
Briefing.com’s consensus (which derives its earnings data from SP Capital IQ I believe) shows EPS consensus of $4.65 on $23.33 billion in revenue for FDX on Thursday night’s release .
The big picture here (hence the title of the preview) is that FedEx volume skyrocketed from mid-2020 with the pandemic and the stay-at-home movement as the Ground network was stress. And then after the pandemic and reopening as labor issues plagued Ground and Express made up the difference with much improved returns we have the advent of Ukraine and Russia causing disruption in Europe and in Eastern Europe at least.
FedEx results by segment:
To kick off the preview, note how Ground’s operating income has been negative for the past two quarters (although it is expected to improve sequentially through calendar 2022) as Ground outperforms the same quarters strength of exercise 21.
In fact, this February 22 quarter is the last tough comparison with “the pandemic bulge” and year-over-year growth comparisons are starting to get easier with the fourth quarter of 22 ending May 22.
That being said, we have disruptions from Ukraine and Europe and complications with FedEx flying over Russian airspace, so any ‘new normal’ supersedes the ‘return to normal’ that was expected in the 2022 timeline .
Forward FDX EPS and Revenue Estimates
This chart takes readers back to May 2019 and consensus EPS estimates at that time. As readers can see from the table, EPS estimates for fiscal 2022 and forward are being revised above the EPS estimates for fiscal 2019 in place before the pandemic.
The interesting thing about studying forward EPS and FDX revenue revisions is that revenue estimates have actually seen better (i.e., higher) revisions over the past three years with the incredible disruption caused by both the start of the pandemic, then the reopening and now Ukraine.
However, due to margin pressure, EPS estimates have not kept pace.
And therein lies the problem.
Labor and labor spending in Ground are expected to improve as 2022 evolves. If Ukraine has an impact on FDX, it will probably be in the Express segment.
At $225 per share, FDX is trading at 11x, the expected 3-year average EPS growth rate of 11%, or 1x PEG (price-earnings growth).
The current “average” expected 3-year revenue growth rate for FDX is 7%.
A useful valuation metric for FDX over the years is the “price to sales” ratio and every time it approaches 1x for FDX, the stock has sold. Trading at less than 0.70x the price of sales (or earnings) today, FDX is much better value than it was on May 21 by selling at 1x earnings.
Finally, the price to cash flow ratio at 7x is historically attractive and while free cash flow (FCF) exploded in late 2020 and early 2021, thanks to the surge in e-commerce, FCF is now receding towards rates normal annual growth. .
The only Achilles heel of FDX over the years has been the generation of FCF given the huge operating leverage with a global distribution network. This is the main reason why FDX has never been a big position for long periods of time, even though customers have always owned the stock for long periods of time, just in smaller amounts. There are longer periods when FDX does not generate free cash, which is why the stock has generally had a paltry dividend and infrequent stock buybacks.
Another key metric for FDX is operating margin, which is nirvana for the freight giant, but FDX only reached this magic number in May 2019 (9.6%), May 2017 (10 .1%), May 2016 (11.6%), May 2015 (10.5%), May 2014 (10.1%) and never reached it from fiscal year 2008 to fiscal year 2013.
Again this (I think) is a function of FDX’s operating leverage and the volatility of this global distribution system, but Ground grows and Express shrinks over time the model might become more stable and so operating margin more stable over time.
Here’s how FDX’s operating margin has evolved over the years:
|End of the fiscal year||FDX av op mgn|
|Exercise 22 YTD||7.1% (after two quarters)|
|Financial year 2020||4.5% (influenced by the pandemic)|
|Financial year 2019||7.3%|
|Financial year 2018||8.5%|
|Financial year 2017||8.3%|
|Financial year 2016||9.8%|
|Financial year 2015||8.9%|
|Financial year 2014||7.6%|
|Financial year 2013||5.8%|
|Financial year 2012||7.5%|
|Financial year 2011||6.3%|
|Financial year 2010||5.7%|
|Source:||Internal valuation table|
The most frequent cases of the affected 10% are in the fourth fiscal quarter of each year, which is the quarter ending in May. What makes this year particularly intriguing is that – with the fuel surcharge in place – if crude continues to decline on April and May 22, this tends to increase FDX margins since the fuel surcharge typically declines at a rate slower than jet fuel could decrease.
Don’t assume this will happen, just watch the price of crude oil.
This weekly chart from FDX shows a pretty good setup heading into Q4 22 earnings for those looking to trade the stock.
FDX remains above its 200-week moving average of $213 and the lower metrics show FDX is deeply oversold ahead of the Q3 22 earnings release.
Summary / Conclusion:
As we approach the third quarter of FY22, we may see continued challenges in the ground segment due to labor issues and potential issues in Express with Ukraine and disrupted airspace , but the stock is valued at a relatively low price, trading at 11 times forward EPS for expected EPS growth of 11%. 7% growth in turnover over the next 3 years.
FDX fell from its all-time high of $307 to $308 on May 21 as it just finished outpacing the decline in 2020 financial results, and the metrics continued to rise rapidly to hit $220 to $225 today. today. The first key trading level would be the early 2018 high near $275.
The land segment will likely retain the market share it gained from stay-at-home momentum in 2020 and early 2021, while Express might need some adjustments given Ukraine.
Clients are long at 1% in aggregate on segregated accounts and I’ve been bullish on the stock since 2020 and Ground’s rise with the pandemic. The intention is to add more to FDX in small amounts before earnings and then possibly larger amounts after earnings.
On Thursday evening’s conference call, listen to:
1.) Labor issues around Ground and Ground margins;
2.) Any continued disruption of express airspace around Ukraine and potential costs to avoid an overflight of Russia;
3.) Q4 ’22 Guidance ending May ’22, usually the strongest quarter of the year;