Throughout most of the year, stocks that are considered cyclical in nature – think autos, airlines, transportation, and energy, to name just a few – have been among the most volatile stocks in the market. That has included companies in the air freight & logistics industry; and while there are a number of players in the industry, the two biggest and most recognizable names without question are United Parcel Service, Inc. (UPS) and FedEx Corp. (FDX). These are companies that provide global air and ground freight services, and while they aren’t immune from economic weakness, signs of a slowing global economy don’t seem to be dampening the outlook for either company too much for the next year or so.
An interesting counterpoint to any perceived economic weakness on a global scale is the fact that e-commerce adoption continues expand globally, and that is a big positive for stocks like UPS and FDX, and a primary reason that most forecasts remain pretty positive for the industry. There are some challenges, to be sure: the current state of trade tensions between the U.S. and China, which is one of the things that has kept these stocks well below their early year highs, remains a touchstone for continued risk moving forward. Recent news that a trade deal between the two countries could be reached within the next few months seemed to be greeted warmly in the market on Thursday, but given the mercurial nature of trade news, that could easily change in a day, and let’s face it, unless and until a deal is actually made, any talk about what might or might not happen is just speculation.
Another risk is that the U.S. economy, which has so far continued to show pretty impressive strength throughout the year, does finally begin to slow down and contract. There is quite a bit of speculation and opinion out there that rising interest rates, which are now moving into their third year are finally taking a bite out of corporate earnings and growth. That isn’t insignificant, and it is a reason to take a cautious approach in any investment decision you might consider right now. When broader conditions are starting to present contradicting, uncertain possibilities for the future, I think it’s smart to pay even closer attention to a stock’s valuation that you might otherwise be inclined to do.
UPS and FDX are stocks that are both a little less than 20% below the highs they reached in the beginning of the year. While I’m careful not to call a stock a bargain or a good value simply because the price has dropped to new 52-week lows, that is an element of my approach to value analysis that at least prompts me to start paying more attention. Between the two stocks, I think FDX has a better overall fundamental profile, based primarily on a superior balance sheet and more manageable debt load. Are they a good value right now? That is a somewhat different question – but I do think this is a stock that is worth paying attention to in the weeks and months ahead.
Fundamental and Value Profile
FedEx Corporation (FedEx) provides a portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the FedEx brand. The Company’s segments include FedEx Express, TNT Express, FedEx Ground, FedEx Freight and FedEx Services. The FedEx Express segment offers a range of the United States domestic and international shipping services for delivery of packages and freight. TNT Express segment collects, transports and delivers documents, parcels and freight on a day-definite or time-definite basis. The FedEx Ground segment provides business and residential money-back guaranteed ground package delivery services. The FedEx Freight segment offers less-than-truckload (LTL) freight services. The FedEx Services segment provides its other companies with sales, marketing, information technology, communications, customer service and other back-office support. FDX has a current market cap of $60 billion.
- Earnings and Sales Growth: Over the past year, earnings increased nearly 38%, while sales improved about 11.5%. Growing earnings faster than sales is hard to do, and generally isn’t sustainable in the long term, but it is also a positive mark of management’s ability to maximize its business operations. The picture is less favorable in the last quarter, as earnings declined about 41%, and sales tapered by about 1.5%.
- Free Cash Flow: FDX’s Free Cash Flow has been negative since the first quarter of 2017, and as of the most recent quarter was -$899 million. Negative free cash flow is definitely a red flag for my fundamental analysis, and it is one aspect where FDX does trail UPS, which has modest, but positive free cash flow over the same period.
- Debt to Equity: FDX has a debt/equity ratio of .79, which is conservative and indicates the company has a disciplined approach to debt management. While the company’s cash and liquid assets have declined significantly since the mid-2017, they also totaled more than $2.3 billion in the most recent quarter. Their balance sheet indicates that operating margins are more than adequate to service the company’s debt, which was a little over $15 billion in long-term debt in the last quarter.
- Dividend: FDX pays an annual dividend of $2.60 per share, which at its current price translates to a dividend yield of about 1.14%.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for FDX is $72.76 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.13. The stock’s historical Price/Book ratio by comparison is 3.3 and puts the top end of the stock’s long-term price target at around $240 per share, or about 5% above its current price. The stock’s Price/Cash Flow ratio provides a more optimistic view, since the stock is currently trading more than 41% below its historical average. That puts the stock’s long-term target price above $320 per share, which I believe is over-optimistic, given the company’s negative cash flow and broader economic uncertainties right now.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: FDX has been a pretty interesting study in market volatility for the entire year, with price swings of 10% to 15% from short-term low to high and vice versa never out of the question. The stock’s drop from mid-October to the beginning of this month was nearly 20% all by itself. The stock’s nearest support is around $218, with the stock very near to resistance right now. In order to reverse the longer downward trend the stock has followed since January, it would need to push above $235 per share, with the best bullish signal coming above $240. A drop below the stock’s 52-week low around $207 would mark a continuation of the downward trend that I would expect to propel the stock to test the $200 level fairly quickly. It also has very strong support in the mid-$190 range.
- Near-term Keys: FDX’s price volatility is the kind of thing that momentum and swing traders live for; from a short-term perspective, a break above resistance, to about $230 would be a pretty good signal to buy the stock or to buy call options with a short-term exit target at around $240 per share. If the stock breaks immediate support at $218, it should drop quickly to test its 52-week lows, which could offer an interesting opportunity to short the stock or work with put options with that bottom as a short-term target. From a value perspective, the stock’s Price/Book ratio doesn’t offer a compelling enough reason to want to work with the stock yet. The value proposition would be much more interesting in the $195 range. This is a stock that is worth watching, but for a value investor, the smart thing given the stock’s downward trend and current market conditions in general is to simply wait for a better price.