FedEx Corporation

 

FedEx, the largest express transportation company operating in over 220 countries and employing over 475,000 people, connects the physical world’s online shopping trends.  The company’s global air and ground networks make the company a key logistics partner especially with time-sensitive shipments.  While the company disengaged business with Amazon, the company supports many retailers’ e-commerce initiatives.  Following the disengagement with Amazon, the company carried excess costs in addition to inefficiencies of the TNT acquisition which are gradually being reduced as the businesses are integrated (mostly complete, final integration expected early CY2022).  The COVID-19 pandemic is driving significant change in shopping/shipping patterns driving reduced capacity (substantial reduction in airline belly capacity for example) and FedEx intends to permanently retain market share while driving future enhancements in its business.  I think estimates for FY22 ($18) and beyond are too low possibly by very material magnitude (early estimates for FY23 are around $21)   

 

Ests:     4Q22   1Q23   FY22    FY23

Revs    24.6b   23.6b   93.5b   97.9b

EPS      6.88     5.18     20.66   22.40

y/y       +37%   +18%   +13%   +8%

 

P=228.13, Div=3.00, yield=2%, D/C=35% (net debt 13.4bn, TTM EPS=20.61, P/E=11X, FY23 P/E=10X

 

Mid Quarter Update – Investor Day, June 29, 2022

  • 3-year Revs CAGR 4-6%, adj OpInc +3-4.5bn by FY25 vs FY22 (10% OM),

  • adj EPS CAGR 14-19% (would put $EPS 30.53-33.97), implies OpEx CAGR +3-5%, CapEx Intensity 6.5% of Revs or less,

  • FedEx Ground OM 11-12% vs 8% in FY22, Express OM 8-9% vs 7.2% in FY22, Freight OM 20-22% vs 17.4% in FY22

  • EU air network integration, reduced SG&A,

4Q22   6.87 vs 5.01 +37%, est 6.88 down slightly from 6.90, FY22 20.61 vs 18.17 +13%

  • Jun 23, 2022, P=228.13, TTM EPS=20.61, P/E=11X, FY23 P/E=10X

  • Revs +8% to 24.4bn (est 24.6bn), OM 9.2% vs 8.7%, OpInc +13.6%, OCF 3.5bn vs 2.7bn

  • Express +5.9%, OM 8.2% vs 8%, OpInc +9.6% on revenue management despite vol softness

  • Ground +4.4%, OM 10%% vs 13.6%, OpInc -23% on higher self-insurance accruals, higher purchased transportation, and wage rates (mgmt. sees pressures stabilizing)

  • Freight +23.3%, OM 21.8%% vs 15%, OpInc +67% on higher rev/shipment due to rev quality.

  • Express: Avg daily packages -10.8% (US domestic -8%), Composite package yield +20% to 24.64, Composite Freight Yield +10% to 1.30, vs 4Q19, avg daily packages -6%, yields +33%

  • Ground Avg Daily packages -5.6%, Yield +10.7% to 11.41, vs 4Q19 avg daily packages +6%, yield +23%

  • Freight Shipments/Day -3.8%, Composite Yield +30% to 35.59, vs 4Q19 shipments/day +1%, composite yield +55%

  • Let some volume go to maintain higher-quality volume and deliver quality service

  • FY23 Outlook: 22.50-24.50, est 22.40 (midpoint 23.50 averaged 5.88/Q)

  • Solid outlook ahead of estimates, doesn’t fully recapture costs from disruptions which shaved off almost 3.50 from EPS in FY22, includes 450m headwind from lower pension income.  Forecast LSD volume growth, factors pressure on B2C volumes and slower inventory restocking on freight demand, prioritizing revenue quality by targeting customers who value FDX unique capabilities: bundles parcel and LTL, Ground is faster to more locations, delivers on Sunday, continue to evolve digital enhancements, robust intercontinental offerings.

  • Management highlighted long-term contracts supporting the revenue base, cost efficiency initiatives underway

  • Expect 24% tax rate, FY23 Capex similar to 6.8bn in FY22, <7% of revs vs 7.2% in FY22, expect to repurchase $1.5bn of stock in 1H

  • Re TNT integration, # of airports served from CDG +71% while intra-EU flights -13%

 

Mid-Quarter Update – June 14, 2022

Raised dividend 53% to 4.60 (2.2% yield).

Changed its long-Term Incentive compensation plan to add total return vs broad market. Also includes a lower capex as % of revenue ratio than before as company lowers its capital intensity.

Adding 3 board members in conjunction with an agreement with D.E. Shaw (activist).

 

UPS Revs +6.4%, EPS +10% to 3.03, Reaffirmed FY22 Guidance

3Q22 4.28 vs 3.08 +39%, ex .29 vs .40 tax benefits, est 4.65 up from 4.39

  • Mar 17, 2022, P=227.98, TTM EPS=17.39, P/E=13X, FY23 P/E=10X

  • Revs +9.9% to 23.6bn, OM 6.2% vs 4.9%, OpInc +37.7%

  • Express+4.8% to 11.3bn, OM 5.8% vs 4.8%, OpInc +27%

  • Ground +10.3% to 8.8bn, OM 7.3% vs 8.8%, OpInc -8.7%

  • Freight +22.7% to 2.25bn, OM 15% vs 6.5%, OpInc +183%

  • OCF 2.2bn vs 2.16bn, FCF 1bn vs 786m, Repurchased $2.2bn in stock.

  • FY22 Outlook: adj EPS still 20.50-21.50, implies 4Q EPS 6.71-7.71 +34-54% (est 6.90)

  • Express: Avg daily packages -10.7% (mostly Int’l domestic again), Composite package yield +19% to 22.89, Composite Freight Yield +11.6% to 1.25

  • Ground Avg Daily packages -0.1%, Yield +9.3% to 10.62

  • Freight Shipments/Day +1.6%, Composite Yield +19.3% to 32.28

  • Omicron also impacted volumes which have rebounded from January levels. 

  • EPS “miss” notwithstanding, solid results with lower variable comp and less severe weather impacts, partly offset by disruptions from Omicron, higher purchased transport costs and wages, still most profitable December in FedEx history. January saw >15% absenteeism and significant flight disruptions (3Q ended Feb 28th)

  • TNT integration on track for END OF MONTH. FY23 estimates of 22.78 way too low unless economy tanks.

2Q22   4.25 vs 3.71 +14.5%, reported 4.83 vs 4.83, est 4.28 down from 5.01

  • Dec 16, 2021, P=238.43, TTM EPS=15.43 (17.77 by mgmt. reporting), P/E=15X, FY22 P/E=12X

  • Revs +14.2% to 23.5bn (est 22.5), OM 7.1% vs 7.4%, OpInc +11% despite ~470m disruption costs

  • Express +12% to 11.6bn, OM 8.8% vs 9.1%, OpInc +8.2%

  • Ground +13% to 8.26bn, OM 5.8% vs 7.5%, OpInc -13% due to ~285m disruption costs

  • Freight +17% to 2.27bn, OM 14.7% vs 13%, OpInc +33%

  • Announced $5bn stock repurchase plan

  • Express Avg daily packages -6 (mostly Int’l Domestic again), Composite Package Yield +20% to 1.20

  • Ground Avg daily packages +4%, Yield +9% to 10.26

  • Freight shipments/day +3%, Composite Yield +18% to 30.51.83.

  • FY22 Outlook: adj EPS back to 20.50-21.50, previously 19.75-21.00, implies 2H EPS +46% y/y and 2H21 was strong growth although 3Q was below potential due to winter storms.

  • Solid results, disruption impact was similar to 1Q but results were better as analysts erroneously inferred results would be flat q/q, guidance implies 2H EPS +46%, even better than expected 6 months ago. 

1Q22   4.37 vs 4.87 -10%, est 5.00

  • Sep 21, 2021, P=252.06, TTM EPS=17.77, P/E=14X, FY22 P/E=12X

  • Revs +14% to 22bn, OM 6.8% vs 8.5% impacted by ~450m due to tight labor market, ~1.50 hit to EPS, OpInc -8% 

  • Express +13.7% to 10.97bn, OM 6% vs 7.7%, Opinc -11.6%

  • Ground +9% to 7.7bn, OM 8.7% vs 11.8%, OpInc -19.5%

  • Freight +23% to 2.25bn, OM 17.3% vs 15%, OpInc +42.3%

  • Express Avg daily packages -0.2% due to Int’l Domestic -13%, Composite package yield +15% to 1.18

  • Ground Avg daily packages -0.1% (commercial volumes grew dd), yield +10% to 10.29

  • Freight shipments/day +12%, composite yield +14% to 29.13

  • Example of inefficiencies some hubs don’t have staff for normal volumes resulting in diversion to other hubs to process the volumes, raising costs and lowering efficiency, looking to hire 90,000 people ahead of the peak volumes. 

  • Expect substantially higher ground capacity this peak season due to investments in infrastructure including >12 automated facilities and sorting expansions. 

  • TNT integration “on track” for spring 2022.  

  • Management expects 12% volume growth despite some moderate shift to in-store shopping or pickup, forecasting 10% annual growth in US domestic volumes through 2026. 

  • Lowered FY22 Outlook: EPS 19.75-21.00 (previously 20.5-21.50) to reflect lower 1Q results, expect similar level of headwinds in 2Q and gradually improving plus possibly other positive drivers, rest of the year implies the same midpoint with a slightly wider range despite weaker 2Q so expecting meaningfully stronger 2H, still expecting EPS +12%, without these headwinds EPS power looks to exceed FY23 estimates.

4Q21   5.01 vs 2.53 +98%, est 4.99 up from 4.62, FY21 EPS 18.17 vs 9.50

  • Jun 24, 2021, P=303.76, TTM EPS=18.17, P/E=17X, FY22 P/E=15X

  • Revs +30% to 22.6bn, adj OM 8.7% vs 5.2% vs 9.6%, FY21 adj OM 7.4% vs 4.5%

  • Express +31.7% to 11.3bn, adj OM 8% vs 4.6% vs 8.8%, FY21 adj OM 7.4% vs 3.6%

  • Ground +27.2% to 8.1bn, OM 13.6% vs 10.5% vs 15.2%

  • Freight +38.4% to 2.2bn, OM 16.1% vs 8.2% vs 9.5%

  • Express Avg daily packages +20.3%, Avg daily weight +5.8%, Composite package yield +11% to 20.51, Composite freight yield +9.3% to 1.18

  • Ground Total Avg daily packages +8.9%, yield +14.4% to 10.31

  • Freight Total shipments/day +30%, Avg weight/shipment -3.5%, Composite yield/wt +9.5% to 27.33

  • FY21 CFO 10.1bn vs 5.1bn, CapEx 5.9bn vs 5.9bn

  • FY22 Outlook: adj EPS 20.50-21.50 (est 20.37), better margins in all units, CapEx 7.2bn, strategic initiatives include accelerated capacity expansion, fleet/facility modernization, increased automation. TNT integration this FY will be inflection point for FY23

  • Results reflect volume growth and disciplined revenue and customer management, partly offset by costs to support demand and higher variable compensation and labor rates (overtime, re-routing volume around bottlenecks). Surcharges to match cost/capacity, much more intelligent. 

  • EU restructuring announced in January should drive 275-300m benefits by FY24 (>$1/sh).  Launched overnight EU to US service, “upside in the profitability of our international business is tremendous”.

  • FY22 US domestic packages est 107m, 72m ex Amazon.  FY26 est to be 172n,  

  • International volumes strong, surcharges not the majority of revenue growth as they improved parcel mix, grew small and medium customer base and penetrated e-commerce with competitive pricing which management thinks will be sticky. 

  • Fantastic results, stock soft as they “only” met expectations for fantastic results. 

 

Mid Quarter Updates

  • Raised dividend 15% to $3.00, yield 1%

  • Not surprising given the dividend freeze expired on May 31st.

  • Fedex and Adobe announced multi-year collaboration so Adobe merchants can offer free two-day shipping, seamless checkout and returns, post-purchase logistics intelligence

  • Adobe Commerce and Magento Open Source merchants will have FedEx extension available in late 2021

3Q21   3.08 vs 1.41 +118% w 25% TR, est 3.24 up from 3.19

  • Mar 18, 2021, P=264.36, TTM EPS=15.31, P/E=17X, FY22 P/E=14X

  • Excludes .39 tax benefit mgmt. included, includes 350m weather-related disruptions, EPS would have been >$4 on an apples/apples basis

  • Adj EPS excludes .17 integration and realignment vs .21 integration, 

  • Revs +22.9% to 21.5bn (8% higher than est), adj OM 4.9% vs 2.8%, OpInc +119%

  • Express Revs +21% to 10.8bn, OM 4.8% vs 2.2% vs 4.9%

  • Ground +37% to 7.98bn, OM 8.8% vs 6.1%, OpInc +98%

  • Freight +6% to 1.8bn, OM 6.5% vs 6.5%, OpInc +5%

  • CFO 2.16bn vs 1.2bn, FCF 786m 

  • Express Total Avg daily packages +12%, Avg daily weight +5%, Composite package yield +7% to 19.21, Composite Freight Yield +15% to 1.12

  • Ground Total Avg daily packages +25%, yield +11% to 9.72

  • Freight Total shipments/day +3%, Avg weight/shipment -3%, Composite yield/wt +6% to 27.06

  • FY21 Guidance: adj EPS 17.60-18.20, implies 4Q 4.43-5.03 vs 2.53, est 4.62, FY22 estimates look too low

  • Fantastic results despite weather disruption costs and investments for growth/efficiencies.

  • Conference call comments to follow

2Q21   4.83 vs 2.51 +92%, est 4.01 up from 2.46

  • Dec 17, 2020, P=292.26, TTM EPS=13.64, P/E=21X, FY22 P/E=16X

  • Adj EPS excludes .13 vs .19 TNT integration costs

  • Revs +19% to 20.6bn, adj OM 7.4% vs 3.9%, adj OpInc +121% 

  • Express Revs +14% to 10.4bn, OM 9.1% vs 3.9%, adj OpInc +169%

  • Ground +38% to 7.3bn, OM 7.5% vs 6.4%, OpInc +61%

  • Freight +5% to 1.9bn, OM 13% vs 7.6%, OpInc +79%

  • CFO 3.6bn vs 1.5bn, FCF 1.2bn

  • Express Total Avg daily packages +10%, Avg daily weight +1%, Composite package yield +2% to 18.24, Composite freight yield +11% to 1.03

  • Ground Total Avg daily packages +29%, yield +7% to 9.42

  • Freight Total shipments/day +1%, Avg weight/shipment -1%, Composite yield/wt +4% to 25.82

  • Still no guidance but expects earnings growth in 2H21 driven by anticipated heightened demand 

  • Very solid results, additional costs could have shaved 15-20% off profits not including higher spending on network contingencies or more staff to deal with pandemic, stock weak after hours possibly due to Ground margin down q/q (peak preparation expenses higher and ramped earlier than usual) 

  • Focus on yield management and available capacity at the right price continues and will not likely abate in the next few quarters, majority of small and medium-sized customers being sheltered from surcharges. Mgmt also intends to capture and keep international air cargo market share, “We are balancing near-term profitability while strategically growing our customer base internationally” 

  • During quarter announced “immaterial” acquisition of ShopRunner to expand their e-commerce capabilities at intersection of physical network and digital capabilities, also boosting value proposition to small businesses using ShopRunner and needing logistics in addition to medium/larger businesses.

  • I think we’re seeing early glimpses of FDX’s capabilities in a post-pandemic world, they’re enlarging their moat and strengthening their durable competitive advantages, I think estimates 2-3 years are eventually going significantly higher, road can be bumpy especially as they ramp spending on ground network but the opportunity is getting more compelling,

1Q21   4.87 vs 3.05 +60%, est 2.69 up from 1.81 (HUGE beat)

  • Sep 15, 2020, P=236.68, TTM EPS=11.32, P/E=21X

  • Adj EPS excludes .14 vs .21 TNT integration costs

  • Revs +13.5% to 19.3bn, adj OM 8.5% vs 6.1%, adj OpInc +56% to 1.6bn

  • Express Revs +7.8% to 9.65bn, OM 7.7% vs 3.8%, OpInc +118%

  • Ground +36% to 7bn, OM 11.8% vs 1.4%, OpInc +29.5% (record revs/Opinc)

  • Freight -4.1% to 1.8bn, OM 15% vs 10%, OpInc +41% (highest OM since 2006)

  • CFO 2.65bn vs 565m, FCF 1.2bn 

  • Express Total Avg daily packages +5%, Avg daily weight -1.9%, Composite package yield -1.7% to 18.28, Composite freight yield +11% to 1.08  

  • Ground Total Avg daily packages +31%, yield +2.2% to 9.33

  • Freight Total shipments/day -8.9%, Avg weight per shipment -2.8%, Composite yield +4.9% to 25.55

  • Re benefits of TNT integration, mgmt. said “before TNT acquisition, we were heavily intercontinental light due to Express and Intra European Express we were good. But we were never present in Intra European ground or the domestic markets now we do and so this portfolio is going to stand us in good stead.“

  • Mgmt believe this is an opportunity to disintermediate traditional freight forwarders’ commercial relationships

  • Implementing peak surcharges to ensure customers using largest proportion of capacity are charged accordingly, helps maintain service levels, also working to protect small and medium sized customers from the impact of most surcharges to help their recovery (they were fastest growing segment in 1Q)

  • Preparing for vaccine distribution, global reach, visibility, extensive temperature control and intervention capabilities especially as ingredient prodn and vaccine manufacturing will likely be in different locations then final distribution.

  • No Guidance but mgmt. exexts higher revs/opinc at Ground and Express for remainder of FY21

  • Very solid results, TTM EPS already higher than FY21 est, ests too low.

4Q20   2.53 vs 5.01 -50%, est 1.52 down from 2.65, FY20 EPS 9.50 vs 15.52

  • June 30, 2020, P=140.10, TTM EPS 9.50, P/E=15X

  • Revs -2.5% to 17.36bn, OM 5.2% vs 9.6%

  • Express Revs -10% to 8.56bn, OM 4.6% vs 8.8%

  • Ground Revs +20% to 6.4bn, OM 10.5% vs 15.2%

  • Freight Revs -17% to 1.6bn, OM 8.2% vs 9.9%

  • No Guidance, expects CapEx $4.9bn, -1bn y/y, 175m in TNT integration expenses in FY21 vs 270m in FY20, total integration expenses expected at 1.7bn, 1.58bn to date (175m in FY21, 270m in FY20, 388m in FY19, 477 in FY18, 327 in FY17, 115m in FY16)

  • Saw week/week improvement since hitting bottom in mid-April

  • Mgmt focused on improving revenue quality (something TFII has been focused on for a while)

  • Flight hours were up 2.6% vs their pre-COVID expectations of -7% due to lower freight capacity from airlines, likely will take quite a while for airline belly capacity to return to normal

  • Completed interoperability of intra-European Ground network as scheduled, COVID-19 pushed out final phase of air-network early in CY22.

  • Results ugly y/y but solid improvement q/q in all 3 segments OM, benefitted from shift to direct-to-consumer e-commerce and also air-freight as lower airline capacity reduced freight capacity in the bellies of passenger flights coupled with improved revenue quality and cost reduction/integration activities.

  

Mid-Quarter Update May 18, 2020

  • Announced partnership with MSFT to transform commerce “by combining the global digital and logistics network of FedEx with the power of Microsoft’s intelligent cloud”.

  • Helps businesses’ visibility into supply chain with analytics in shipment tracking, inventory management.  Other capabilities to be announced. 

 

3Q20   1.41 vs 3.03 -53%

  • March 17, 2020

  • TTM EPS 11.98, P/E=10X, FY21 P/E=12X

  • Revs +2.8% to 17.49bn, OM 2.8% vs 5.8%

  • Express Revs -1% to 8.9bn, OM 2.2% vs 4.9%

  • Ground Revs +11% to 5.8bn, OM 6.1% vs 11.1%

  • Freight -1% to 1.7bn, OM 6.5% vs 5.5%

  • Continuing to retire oldest and least-efficient aircraft, integrating TNT

  • Re TNT integration, on track to hit important milestones as the end fiscal year, will complete interoperability of intra-European ground network in 4Q, lowers cost.

  • On track to complete air network integration in fall of 2020 which will end the physical network integration of TNT.  

  • FY21 performance should benefit from lapping the loss of Amazon and costs of FedEx Ground 7-day delivery expansion.

  • Mgmt. very focused on being low-cost producer

2Q20   2.51 vs 4.03 -38%

 

1Q20   3.05 vs 3.46 -12%

 

4Q19   5.01 vs 5.91 -15%, FY19 EPS 15.52 vs 15.31