Is FedEx a Good Defensive Play?

With shares of FedEx Corporation (NYSE:FDX) trading at around $97.96, is FDX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

On the positive side, FedEx is expanding higher margin operations, it’s undergoing a strategic cost-cutting program, and revenue has been solid. However, there are many negatives as well, which include:

  • Weakness in international freight markets
  • Industry overcapacity
  • Consumers opting for cheaper and slower transit services
  • Decreasing capacity to and from Asia (could be a positive, but limits growth potential)
  • Operating income down 28 percent year-over-year
  • Operating margin down 7.7 percent year-over-year
  • Net income down 31 percent year-over-year
  • FY2013 diluted EPS expectation of $6.00 to $6.20 (strong, but would be a decline)

It should be noted that some of these negatives relate to business realignment.

The earnings report is old news, but not many people read the specifics. We’ll get a little specific without going overboard. These are just some simple numbers that offer a clearer view of the situation.

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FedEx Ground

  • Revenue increased 11 percent year-over-year
  • Operating income of $467 million, up from $465 million last year
  • Operating margin of 17 percent, down from 18.8 percent last year

FedEx Freight

  • Revenue of $1.24 billion, up from $1.23 billion last year
  • Operating income $4 million, compared to $1 million loss last year
  • Operating margin of 0.3 percent, up from (0.1 percent) last year

FedEx Express

  • Revenue increased 2 percent year-over-year
  • Operating income down 66 percent year-over-year
  • Operating margin at 1.8 percent, down from 5.3 percent last year

Now let’s take a look at some comparative numbers. The chart below compares basic fundamentals for FedEx, United Parcel Service (NYSE:UPS), and Expeditors International of Washington (NASDAQ:EXPD). FedEx has a market cap of $30.98 billion, UPS has a market cap of $80.67 billion, and Expeditors International has a market cap of $7.63 billion.

FDX

UPS

EXPD

Trailing   P/E

17.12

101.93

23.52

Forward   P/E

12.93

14.92

18.10

Profit   Margin

4.12%

1.49%

5.57%

ROE

11.06%

2.25%

16.47%

Operating   Cash Flow

$4.79 Billion

$7.22 Billion

$370.13 Million

Dividend   Yield

0.60%

3.00%

1.50%

Short   Position

1.70%

1.90%

N/A

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong       

The debt-to-equity ratio for FedEx is stronger than the industry average of 0.50.

Debt-To-Equity

Cash

Long-Term Debt

FDX

0.14

$3.37 Billion

$2.24 Billion

UPS

2.73

$7.92 Billion

$12.92 Billion

EXPD

0.00

$1.26 Billion

$0

 

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T = Technicals Have Weakened    

FedEx has performed well over the past year, but the past month has been disappointing. This is directly related to earnings. The question now is if the bar has been set low enough to leave room for upside potential or if this is the beginning of a longer downtrend.

1 Month

Year-To-Date

1 Year

3 Year

FDX

-9.14%

6.93%

13.77%

9.29%

UPS

0.15%

15.55%

11.30%

43.33%

EXPD

-4.24%

-6.32%

-16.55%

3.13%

 

At $97.96, FedEx is trading below its 50-day SMA, but above its 100-day SMA and 200-day SMA.

50-Day   SMA

103.30

100-Day   SMA

97.93

200-Day   SMA

93.61

 

E = Earnings Have Been Steady                     

Revenue and earnings have consistently improved over the past few years. However, we already known that EPS is likely to decline in 2013.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

37.95

35.50

34.73

39.30

42.68

Diluted   EPS ($)

3.60

0.31

3.76

4.57

6.41

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and a decline in earnings. Revenue and earnings have also declined on a sequential basis. This isn’t necessarily a red flag, but it’s certainly not a positive.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

10.56

11.01

10.79

11.11

10.95

Diluted   EPS ($)

1.65

1.73

1.45

1.39

1.13

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

There are two big question marks for the industry at the moment. Which direction is fuel headed? Is the economic recovery real or non-existent without Fed assistance?

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Conclusion

FedEx has been a long-term winner, but there are many headwinds at the moment. One of the biggest concerns isn’t company-specific. As the stock market continues its ascent, the dangers of a steep correction increase. And FedEx is not a good defensive play. If the stock market continues to rise and this proves to be a true recovery, then FedEx is a bargain here.

All factors considered, FedEx is a WAIT AND SEE.

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