The post was originally published here.
What’s interesting about FedEx is that its margin is half of its main competitor UPS
Q1 2023 hedge fund letters, conferences and more
3 things to know about this company:
- Weak demand squeezes volume requiring price increases to keep revenue on track
- Accelerating cost-cutting program makes margin expansion key catalyst
- Reducing capital spend could help to improve shareholder returns
Download the full report as a PDF
Revenue breakdown 2022 (other 5%)
My framework for forecasting free cash flow growth potential
Story I: Weak demand squeezes volume requiring price increases to keep revenue on track
- This chart shows average daily package volume of both express and ground shipments from 2016 to 2022
- And on the right-hand scale it shows freight volume as measured by average daily shipments
- Over the past 6 years, FedEx was able to expand its avg. daily volume of Ground and Express services from 12,000 to 16,000 packages
- Its freight segment (green line) has recovered to pre-pandemic levels and stands at 112 daily shipments
- However, the YoY comparison of the recent months shows that volume started to decline
- For example, domestic Express packages volume was down 16% in Nov’22
- The management expects weak demand throughout 2023 as well
- This chart shows the revenue per package for Express Domestic and International as well as Ground from 2016 to 2022
- On the right-hand scale it shows revenue per shipment for Freight shipments
- The avg. revenue per package has been mostly stable and flat among all transportation methods
- Only freight rates saw good consistent hikes
- Though, in 2022, FedEx raised the prices of ground and express services to offset inflation effects
Expect sluggish 3% growth going forward
My framework for forecasting free cash flow growth potential
Story II: Accelerating cost-cutting program makes margin expansion key catalyst
- FedEx management has proposed a plan to cut US$4bn in operating costs by 2025
- For its Express segment, it aims to improve the air network by cutting inefficient routes and reducing flights
- In this chart we look at the two largest costs for FedEx, that’s cost of service and SG&A expenses from 2016 to 2022
- On the right-hand scale, we show EBIT margin
- The EBIT margin has been stable, ranging between 6-8%, except for 2020 when it got cut nearly in half
- Its main competitor, UPS enjoys a 13% operating margin
- Hence, there is room for FedEx to improve
My framework for forecasting free cash flow growth potential
Story III: Reducing capital spend could help to improve shareholder returns
- This chart shows total capital expenditures from 2014 to 2022
- And on the right-hand scale, we show CAPEX as a percent of revenue
- Over the past 9 years, FedEx’s CAPEX/revenue averaged 8.2%
- However, it started to show a declining trend in line with the company’s mission to employ capital more efficiently
- The goal is to bring it down to 6.5% by 2025
My framework for forecasting free cash flow growth potential
Simplified valuation
- Finally, we divide this by the number of shares to arrive at our value estimate per share
Get financial statements and assumptions in the full report
Value estimate
- Our base case valuation is US$247 or a 21% upside
- For our bull case we use a an 8%, rather than 9% WACC to get our US$300 valuation with a 47% upside
- The bear case assumes a WACC of 10%
Download the full report as a PDF
Article by Andrew Stotz, Become a Better Investor.
