FedEx (NYSE: FDX) is a transportation and shipping company whose brand is well-known for offering various services, including transportation, e-commerce, and business services.
The company operates through four primary segments: FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services, which provide domestic and international shipping for package delivery and freight.
FedEx has been on investors' watchlists lately due to the company's direct relationship with the ongoing supply chain crisis. With e-commerce sales skyrocketing following the COVID-19 pandemic, FedEx has experienced unprecedented levels of demand for domestic and international shipping.
The company's most recent quarterly report was quite strong, while the latest dividend increase should grow investors' confidence regarding FedEx's future capital returns. For this reason, I am bullish on the stock.
Latest Results
Last week, FedEx reported its Q2 2022 results, with revenues growing 14.3% to $23.5 billion against the comparable quarter a year ago. The company's performance was boosted once again mainly due to higher package and freight yields and larger international export express shipment volumes.
The company also utilized very effective cost management while achieving a 14% growth in revenue per shipment. Consequently, FedEx Freight achieved operating income growth of 33%, and an operating margin of 14.7%, which translates to a 170 bps improvement compared to last year.
This was the case despite the ongoing labor market hurdles from which many companies in the industry suffer (e.g., a shortage of truck drivers). Nonetheless, amid extraordinary expenses related to a constrained labor market, non-GAAP EPS was $4.83, the same as last year.
Excluding the evaluated expenses related to TNT Express’ integration with the company, management expects EPS to be between $20.50 to $21.50 (previously $19.75 to $21) for FY 2022.
The Dividend
Regarding FedEx's dividend, management has been cautious with DPS increases, consistently making sure that the company maintains a substantial margin of safety before a potential hike. This is the case despite the continually low payout ratios.
Due to this, FedEx has consistently kept paying shareholders and has avoided potential dividend cuts, despite the ups and downs attached to its business model. The company has never cut its dividend since the first one it paid back in 2002.
In June, FedEx increased its DPS by 15.4% to a quarterly rate of $0.75, while with its Q2 results, the company also announced a new $5-billion share repurchase program to add to its total capital returns.
Valuation
FedEx's shares are currently trading with a forward P/E of 11.9 based on the midpoint of management’s EPS forecast ($21), which is below its historical average.
For this reason, it's not unlikely for the stock to undergo a valuation expansion to what I would consider a fair P/E of around 14. In that regard, shareholders also enjoy a higher margin of safety, while FedEx's share repurchases should be quite fruitful, considering the company is likely acquiring shares at a discount.
Wall Street’s Take
Turning to Wall Street, FedEx has a Strong Buy consensus rating based on 18 Buys and four Holds assigned in the past three months.
At $310.71, FedEx's stock price prediction suggests 24% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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