FedEx: Omicron Variant and Labor Shortage Are Risks

FedEx Corp. (FDX) is a multinational delivery services company based in Tennessee. It provides transportation, e-commerce, and business services worldwide. The company was founded in 1971.

I am neutral on FDX stock. A large amount of debt and moderate growth along with operating risks such as the Omicron variant and harsh weather conditions harm business performance.

FedEx Corporation Business News

On December 17, 2021, FedEx Corp. announced it “received its first five of an order of 500 electric Light Commercial Vehicles (eLCVs) from BrightDrop, the new electric delivery and logistics business from General Motors (GM). The introduction of BrightDrop’s all-electric, zero-tailpipe emissions vehicles into the FedEx fleet is an important step in the company’s goal to take its global operations carbon neutral by 2040.”

FedEx can be described as a pioneer in using cleaner transportation sources and addressing climate change as it was the first delivery company to use hybrid vehicles in 2003. In 1994, FDX used an acid battery-powered vehicle – the company’s first electric vehicle.

Improving customer experience should be a priority for all businesses, and FedEx is actively focusing on this by announcing that its subsidiary FedEx Logistics, Inc. will have its business unit FedEx Trade Network integrate WiseTech Global’s CargoWise digital platform into its global ocean and air transportation network.

Some notable features of this business decision are the ability to scale customer growth and, at the same time, respond quickly to challenges and risks by the global supply chain.

Turning to growth again, the delivery company recently completed a major development of its air cargo hub at Miami International Airport. This is a strategic investment that will serve and connect better international operations amid the countries of the U.S. and Canada to the Caribbean and Latin America. The expansion is also expected to be beneficial to job growth.

Second Quarter Fiscal 2022 Earnings: Beat on Revenue, Miss on EPS

FDX stock earnings were a miss as GAAP EPS of $3.88 was lower than expected by -$0.21. Revenue of $23.47 billion was a beat by $1.06 billion.

Here are some highlights for Q2 Fiscal 2022 results on a year-over-basis:

Total revenue was up 14%, adjusted operating income of 7.1% was lower 30 basis points, adjusted net income of $1.3 billion was unchanged, and adjusted diluted EPS of $4.83 was also unchanged.

Fundamentals – Risks

Year-over-year operating margin, net income, and diluted EPS all declined. On the positive side, operating income increased to $1.6 billion from $1.47 billion in Q2 of Fiscal 2021.

FedEx Corp’s operating margin has declined over the past five years. It was 9.7% in Fiscal 2016 and is now 8.7% for the trailing 12 months.

Piotroski F-Score is 8, indicating a very healthy situation and revenue per share shows consistent growth. It can be argued that FedEx Corp has shown predictable revenue and earnings growth to a large extent.

The 10-year average growth of revenue and EPS has been 7.9% and 15.6%, respectively, which I consider to be very moderate.

Investors looking for Top Dividend Stocks may get excited to know that the dividend yield of FedEx is close to a one-year high. However, its yield is lower than the S&P 500’s yield of 1.3%.

FDX stock has a forward dividend and yield of $3.00 and 1.17%, respectively.

FDX has been issuing new debt. In the past three years, it issued $2.2 billion of debt, and its debt/equity ratio of 1.48 as per the latest quarter is high.

The company recently announced that the Omicron variant and harsh weather have caused shipping delays. Being short on workers due to the pandemic could further harm profitability.

Valuation

Examining forward valuation, the stock has a forward P/E ratio of 13.2, less than the industrials sector median value of 22.3. FDX’s forward price/sales of 0.7 is lower than the median value of 1.66 for the industrials sector, making it relatively undervalued.

Wall Street’s Take

Turning to Wall Street, FedEx stocks earns a Strong Buy consensus based on 12 Buys and two Holds ratings. The average FedEx price target of $309.71 represents 19.6% upside potential.

Conclusion

FedEx Corp had a very strong Fiscal 2021 with revenue growth of 21.1% and net income growth of 306.8%; however, in the last quarter, net income fell 6.1%. These swings in key metrics signal increased risk along with a high debt level.

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