FedEx Stock Prediction: A well-Positioned Business with Further Upsides Haven’t Been Priced In

motek 1The stock prediction article was written by Tianyue Yu, Analyst at I Know First, Master’s candidate at Brandeis University.

Summary

  • FedEx comprehensively benefits from the new market trend under pandemic
  • Strong pricing power brings impressive margin performance in Q1 2021
  • DCF model shows a further bull trend towards the $300 target price

FedEx is Well-positioned to Benefit from the Market Trend Under COVID-19

FedEx(FDX) stock price gained more than 60% in the past three months, outperforming S&P 500 at 5% and the overall transportation industry at 25%, respectively, representing positive stock idiosyncrasies support a bull FedEx stock forecast in the following year.

In the 2021 Q1 earnings call, FedEx implied two major trends that showcase the company’s value position under the COVID-19. The most profound one is a dramatic acceleration of E-commerce globally. Set the U.S. as an example; the quarterly e-commerce retail sales increased by around 32% in the second quarter in 2020, compared with single-digit increases in previous quarters. FedEx projected that the U.S. domestic parcel market will hit 100 million by the calendar year 2023, pulling volume projections forward by three years from their last expectation. This acceleration boosts the demand for FedEx’s parcel delivery business. Both the Total Package Volume and Average Daily Package Volume see an upward trend in the past year, supporting the revenue growth across most FedEx sectors.

(Source: Statista)
fdx stock forecast
(Source: FedEx Q1 FY21 Stats Book)

Besides, COVID-19 vaccine shipment could be another potential earning upside for FedEx. Although the key variables of vaccine parameters remain uncertain, FedEx will be one of several reliable carriers to distribute vaccine cargo given its extensive shipping network and mature cold chain shipping capabilities. FedEx also launched FedEx SenseAware ID right before the earnings call to provide enhanced package visibility for shipments. This new feature will get the company better prepared for this huge vaccine delivery order.

The Tight Capacity in Parcel Delivery Markets and Airfreight Constrain Support FedEx’s Pricing Power

FedEx announced implementing a surcharge on certain home deliveries package in August. So far, FedEx, UPS, and the Post Office are all tacking on introducing surcharge ahead of the usually busy holiday season at the end of the year. This movement of all three primary package delivery companies indicates the market’s tightness resulting from an increase in delivery demand. FedEx Ground sector will largely benefit from this surcharge. A tailwind for pricing power will continue in the rest of 2021, considering the current demand/supply mismatch.

Meanwhile, under the air flight constrain, the air cargo capacity reduction resulted in the significant loss of commercial airline capacity. Current estimation shows that freighter capacity now accounts for 66% of total air capacity on the trans-Atlantic lane, 83% on the trans-Pacific, and 80% on Europe to Asia lane. These results compare to the pre-COVID freighter capacity of 33% for trans-Atlantic, 59% for trans-Pacific, and 50% for Europe to Asia. Equipped with large freighter fleets, FedEx is capturing strong revenue in the international express sector. We can also expect a steady yield increase in the FedEx Express and Freight Corporate sectors, given a better pricing power in this tight market.  

(Source: Google Image)
fdx stock forecast
Source: FedEx Q1 FY21 Earnings Report)

More Company Level Progress Hasn’t Been Priced in to Support a Bullish FedEx Stock Forecast

The Q2 results present impressive operating margins in all three major FedEx sectors, mainly attributed to a favorable yield result and stable cost level. Despite the considerable pressure on the margin the past several quarters, these results indicate FedEx is still aiming for a 10% operating margin in Express and 13% in the Ground sector in the future.

fdx stock forecast
(Data Source: FedEx quarterly report)

Another worth mentioning progress is the integration of TNT Express. According to FedEx president, the full network integration of the TNT acquisition will be completed over the next 18 months. The value of this transaction has always been undervalued because of the vast amount of integration expenses. As the president pointed out, the acquisition will provide FedEx with a strong portfolio that can help FedEx build on and compete within Europe. I predict that the influence of this acquisition will not take place until 2023. By then, the COVID-19’s impact on the European economy will fade out. Given the increasing trend of parcel delivery market size in Europe, the potential upside of the international revenue of FedEx could be considerable. The improvement in the European market will reflect on higher revenue in the Express and Freight sectors, supporting a positive FDX stock forecast.

(Source: Statista)
(Source: Statista)

FedEx is More Likely to Gain Comprehensive Upsides Under COVID-19 Than Its Competitors

While the whole transportation industry is experiencing a boom under the pandemic, it is necessary to take a look at FedEx’s competitors operating performance. I formed a peer group of three intermediate competitor companies: UPS (UPS), Deutsche Post (DPW), and C.H. Robinson Worldwide (CHRW). Their stock prices all saw a great increase in the past six months. Among them, UPS stock shares a similar growth pattern with FedEx before September. The news of imposing surcharge boosted the stock price by 7% in one trading day in August.

fdx stock forecast
(Source: Yahoo Finance)

The positive stock idiosyncrasies of FedEx kicked in after the release of the quarterly report in September. Financial data showed that FedEx gained the top gross margin growth in the latest quarter in the peer group, reflecting a robust revenue and the ability to control cost. In addition, FedEx’s expertise in time-sensitive services and international air freight is the key advantage to win this market.

(Data Source: Capital IQ)

DCF Model Shows a Target Price at $300, Representing Further Upside in FDX Stock Forecast

Reflecting on all the factors mentioned above, I estimated the key financial numbers in the next five years and built DCF modeling to perform the FedEx stock forecast.

Key assumptions

Revenue:

FedEx revenue will experience an upward trend overall in the next five years, given the generally larger E-commerce volume, and the growth rate will get normalized after COVID-19 has gone. I expect to see the revenue increase signal in the Express and Freight sectors after 2022 resulted from TNT Express integration. Meanwhile, as FedEx continuing extending the coverage of 7-day delivery in the U.S., a broader customer base and higher turnover will drive a sustainable revenue increase in the Ground sector.

Operating Expenses

I predicted that the expenses in FedEx Express and Freight sectors will significantly decrease after 2022 because of the completed TNT integration process. There will be $125 million of integration expenses in the remainder of 2021 in line with management’s guidance. Meanwhile, in light of the low oil price in recent years, I expected the fuel expenses in all sectors will keep at a low level in 2021 and 2022.

Capital Expenditure

The CAPEX assumptions are based on management’s prospect across different segments. The CAPEX at FedEx Express and Freight sectors are expected to significantly decrease in 2021 as the company delays facility investments and decrease spending on vehicles and trailers replacement, as well as ground support equipment. In the Ground sector, in order to support the strategic investments and enhance the 7-day delivery services around the U.S., capital expenditures in 2021 at FedEx Ground are expected to increase. Besides, I expected that capital expenditure as a percentage of revenue will down to around 7% in the following years because of a CAPEX-to-revenue target of 7% in the FedEx executive incentive compensation program metrics.

fdx stock forecast

DCF results

The DCF model indicates the target price of FedEx at $300, representing $17.64 EPS in 2021. My FedEx stock forecast is slightly more optimistic than the analyst’s consensus on Yahoo Finance. I believe that FedEx is ready to fully capture the boom in the parcel delivery industry under the pandemic. The financial number and the stock price will see robust growth in the next year. In the long run, the high demand for delivery may fade marginally and normalize. The ability to expand the business, increase the yield, and improve delivery efficiency build the core competitiveness of a company in the package delivery industry. FedEx’s next-step strategy towards these three aspects in the new stage of the market will be the main focus of investors in the long run.

fdx stock forecast

Conclusion on FDX Stock Forecast

I believe the DCF results indicate the intrinsic value of FedEx stock correctly based on the upside opportunities mentioned above. Along with the universal usage of the e-commerce platform, the demand for package delivery will be brought to the next level. FedEx’s obsession with operating development and strategic initiatives will add more flavor to the long-term growth at the company level.

My bullish prediction for FDX is backed by positive prediction results from I Know First. The stock price will keep an upward trend in the rest of FY2021 supported by the momentum. After unveiling the annual operating results next year, FedEx will deliver longer favorable performance as suggested by the forecasting model.

Past Success With FDX Stock Prediction

I Know First has been bullish with its FDX in the past. On July 29, 2020, the I Know First algorithm issued a bullish forecast for FedEx stock price and recommended FDX as one of the best transportation stocks to buy. The AI-driven FDX stock prediction was successful on a one-month horizon resulting in more than 60% gain since the forecast date. See the chart below.

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