Once a stalwart of the cyclical transportation niche and a bellwether for the broader market, iShares Transportation Average ETF (IYT) sputtered in the first quarter of 2024, signaling a potential correction for the S&P 500. However, within that ETF, one of its largest components, FedEx (NYSE: FDX), defied the trend.
Following a robust third-quarter 2024 report in March, analysts remain optimistic about FDX’s prospects, maintaining a buy rating. The company’s consistent growth forecasts make it an attractive GARP play, especially considering its current undervaluation.
According to Bank of America Global Research, FedEx offers a diverse portfolio of transportation, e-commerce, and business services, operating in four primary segments: FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services. With a global reach spanning over 220 countries, the company provides comprehensive transport and supply-chain solutions worldwide.
In March, FDX reported a solid third-quarter performance. Non-GAAP earnings per share (EPS) of $3.86 surpassed estimates of $3.48, although revenue of $21.7 billion slightly missed consensus, declining 2% year-over-year. Despite the revenue shortfall, the company’s cost-savings program remained a key focus. A 13% year-over-year jump in net earnings puts FDX on track to achieve its $1.8 billion expense reduction goal for fiscal year 2024.
Wall Street responded positively to these results, with shares climbing 7.4% in the following session. Analysts currently anticipate operating EPS of $5.38 for the upcoming June earnings announcement, representing a 9% year-over-year increase. The options market indicates potential stock price volatility of around 4.8% following the earnings release.
Valuations remain favorable for FDX. Analysts at BofA expect earnings to increase by approximately 20% in fiscal year 2024, with per-share profits continuing to rise through 2026. The Seeking Alpha consensus forecast aligns with this growth trajectory, projecting operating EPS to potentially surpass $21 in the next 12 months.
Revenue is likely to remain below prior-year levels in 2024, but positive momentum is anticipated in the following years. Dividends are forecast to increase to $5.40 next year and remain stable thereafter. The company’s low enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) ratio and strong free cash flow suggest that the recent earnings volatility may be subsiding.
Historically, FDX has traded with a mid-teens multiple, and its current forward non-GAAP price-to-earnings (P/E) ratio remains slightly below that average. Applying a conservative 15x P/E multiple to the anticipated $21 of operating EPS over the coming 12 months suggests a fair value of approximately $315 per share, indicating that FDX is currently undervalued.
In comparison to industry peers, FDX boasts a middling valuation rating, while its recent growth trajectory has been relatively weak. However, the company’s ongoing cost-cutting initiatives and focus on margin improvement are expected to lead to a significant increase in earnings by 2026. Profitability trends remain robust, as evidenced by Seeking Alpha’s A+ Quant Factor Grade, and sell-side EPS revisions have recently turned positive.
Technically, FDX appears poised for further growth. The stock has recently filled both a downside and earnings-related gap, indicating a potential reversal of the recent downtrend. Moreover, shares have successfully defended a convergence of moving average support points, with both the 50-day and 200-day moving averages trending upwards. A bullish golden cross pattern, which occurs when the 50-day moving average crosses above the 200-day moving average, took place earlier this month, providing further technical support.
Overall, FedEx presents a compelling investment opportunity. The company’s solid growth prospects, combined with its current undervaluation and favorable technicals, make it an attractive buy. Investors seeking exposure to the transportation sector should consider FDX as a top pick.
