Integrated freight & logistics company FedEx is taking Wall Street by surprise today, falling to $161.02 and marking a -21.4% change compared to the S&P 500 (-0.8% ). FDX is -44.16% below its average analyst target price of $288.36, which implies there is more upside for the stock. As such, the average analyst rates it at buy. Over the last year, FedEx has underperfomed the S&P 500 by -7.7%, moving -19.7%.
As of the third quarter of 2032, the average Price to Earnings (P/E) ratio for US Industrial companies is 21.46, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes. Fedex's trailing 12 month P/E ratio is 11.2, based on its trailing Eps of $14.33. The company has a forward P/E ratio of 6.5 according to its forward Eps of $24.76 -- which is an estimate of what its earnings will look like in the next quarter.
Studying a company's earnings can give investors much more than just insight into its stock's valuation. By looking at earnings growth over time and comparing it to revenue growth, we can see the evolution of the company's profit margins, which we can then use to make inferences about the company's competitive advantage in its market. Fedex 's year on year (YOY) quarterly earnings decreased at a rate of -69.4% while its YOY quarterly revenue grew at a rate of 8.1%. Since earnings are growing at a slower rate than revenue, the company's profit margins are shrinking as a result of increases in the their tax liabilities, decreasing product prices, an increase in overhead, or a rise of the cost of goods sold.
Unlike earnings, gross profits are the company's revenue minus the cost of goods only, and don't take into account taxes and overhead. Analyzing gross profit margins as opposed to net (operating) margins gives a better picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack therefor. FDX has gross profit margins of 25.0%, from which we can infer that its competitive advantage is probably not absolute, and is facing some pricing pressure from other companies within the same market.
Companies have many other costs and sources of income occurring outside of their core business. Everything from equipment depreciation, returns on capital investments, legal costs, income from intellectual property, and interest payments on debt factor into the company's ultimate profitability. We can see the effect of these additional factors in FedEx 's levered free cash flow of $1,188,749,952. With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in FDX have received an annualized dividend yield of 1.7% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Fedex's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.7, but is still below the average P/B ratio of the Industrials sector, which stood at 3.7 as of the second quarter of 2022.
As of third quarter of 2032, Fedex is likely undervalued because it has a very low P/E ratio, a lower than average P/B ratio, decent profit margins, an analyst consensus of strong upside potential, and strong cashflows. We hope this preliminary analysis will encourage you to do your own research into FDX's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
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