Skip to Content
Stock Analyst Update

A Fair Value Hike for FedEx

The narrow-moat company improved value and pricing during the quarter, and we expect margins to improve.

Mentioned:

Solid pricing, volume, and execution mark  FedEx’s (FDX) third quarter, and while ground margins were strong, express declined year over year, thus operating income slid 2% versus the prior-year period. We increased our fair value estimate to $260 from $247 per share after incorporating these results (including our expectation of strong express results going forward), tax guidance, time value of money since our prior update, as well as the slight reduction to fiscal 2018 capex plans and taking on increased debt to fully fund U.S. pensions. We believe moats are intact in express and ground.

FedEx grew total revenue 10% year over year, improving volume in two segments and pricing in three. Express volume was flattish, but pricing improved 8%. Ground and freight were both healthy, with the former up 6% in both volume and revenue per package, and the latter growing 6% in shipments and 8% in revenue per shipment. Excluding fuel, yield per shipment was up 3% in express, 5% in ground, and freight revenue per shipment was up 6%--all quite healthy, in our view.

Express' normalized operating margins slid 170 basis points year over year,to a mere 5.4% due to weather challenges, TNT integration costs, high peak season costs, and variable compensation accruals. Ground improved operating margin by 110 basis points to 12.1% on rate gains and volume leverage, constrained by variable compensation and network expansion costs; EBIT improved 23%. Freight operating margin was a (typical for third quarter) low 3.2% despite gains in shipments and pricing. Management shared fourth-quarter segment margin expectations that are high but in line with our full-year expectations: Express 9.1%-9.6%, ground 17.0%-17.5%, and freight 8.0%-9.0%.

The quarter met our general expectations, but volume and price were stronger than we anticipated. We believe margins will continue to advance in both express and ground as the firm continues to invest in automation and refleeting, as well as in TNT improvements.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Keith Schoonmaker does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.