Is FedEx Stock Overvalued?

FedEx Corporation (NYSE:FDX) operates a global logistics network that has been in high demand as consumers turned from brick-and-mortar shopping to online ecommerce purchases.

Revenues have been soaring as Black Friday and Cyber Monday deals were anticipated to be higher than ever. And FY 2021 revenues are expected to dwarf FY 2020 figures.

As profits and revenues have blown away optimistic estimates, investors are wondering is Fedex stock overvalued?

Fedex share price has more than tripled from its 52-week low of $88.69. In fact, it made up for any shortcomings over the past two years caused by Amazon’s build-out of its own delivery network.

A concern for investors is whether a new White House administration approach to funding of the U.S. Postal Service will challenge FedEx’s market share for parcel deliveries.

The answer lies in FedEx’s books to determine if it can deliver a healthy profit for investors or if its stock should be returned to sender.

Why FedEx Stock Went Up

FedEx saw strong revenue growth in its first fiscal quarter, which started a steady price climb over the remainder of the year.

By October, it seemed to hit a ceiling, until positive news about herd immunity from Pfizer (PFE) and Moderna (MRNA) sparked a bull run on the entire market. 

There were two catalysts for this growth. One is the slowdown of air travel leaving fewer international courier options available. The other was solid financial reports that beat analyst earnings estimates. Here’s what you need to know about the company’s earnings.

FedEx Financials Are Stellar

FedEx had a banner year in 2020, thanks in no small part to the fallout from a migration in consumer behavior towards online vs offline shopping. The company’s first quarter for fiscal year 2021 closed with $1.59 billion in revenue, up from $980 million in the same quarter of the 2020 fiscal year.

That generated income of $1.25 billion versus $745 million in the prior year’s first quarter. And it raised its operating margin from 5.7 percent to 8.2 percent year-over-year and has a P/E ratio over 40x, much higher than the approximately 30x P/E ratio of its primary rival, UPS.

FDX stock pays a quarterly dividend which was raised in 2018 to $0.65 per year. It didn’t raise dividend payouts in spite of record high earnings during FY 2020. This gave it a 0.91 percent yield on a $2.60 annual dividend.

Volume growth occurred in FedEx International Priority and U.S. Domestic streams, while yield improvement for FedEx Ground and Freight services and an additional delivery day offset coronavirus and expansion costs.

However, the company hasn’t yet provided guidance for the 2021 fiscal year, with capital spending increased from to $5.1 billion. It’s unclear how much benefit its logistics refinements can bring when competing with USPS, UPS (NYSE:UPS), and Amazon (NASDAQ:AMZN).

Is FedEx Valuation Too High?

FedEx stock skyrocketed in 2020 to surpass its previous high market capitalization from the winter of 2017.

FDX shares started the year at $150, dropped to a low of $88.69 during the general market correction, and then steadily rose to a high of $296.08 before leveling off.

With Black Friday and Cyber Monday sales over, investors have targeted a year-end FedEx share price of around $300.

In fact, all signs are pointing to it continuing to rise through January 2021. But the real question is whether it can sustain this growth when the economy inevitably returns to normal. There are several competitive factors to consider.

The first is the return of airline travel, which will return courier services to normal functionality and eat away at FedEx’s volume growth.

Then there’s the expansion of several delivery services that use contracted drivers, like Uber (UBER) and Postmates, partnering with retailers like Walmart (WMT). The same companies that disrupted public transportation and taxis could come for FedEx next.

Amazon’s name is highlighted more than USPS and UPS (UPS), because its logistic network poses a bigger threat. It already delivers 2.5 billion packages a year in the U.S., compared to 4.7 billion via UPS and 3 billion via FedEx.

And It’s unclear whether the FedEx infrastructure can compete with the others.

Will FedEx Stock Drop?

It may have a historic high market capitalization, but there are more threats to FedEx’s delivery network than ever before.

It has less market share than UPS and USPS, and it even lags behind DHL in many markets. USPS delivery trumps FedEx (FDX) for smaller packages, and UPS (UPS) and DHL are more reliable for international shipments.

This doesn’t even consider the news ways of getting products into people’s homes spawned by the coronavirus pandemic.

Many stores now have robust curbside pickup and delivery options that can bypass FedEx. With people being cooped up by stay-at-home orders and colder weather, many welcome the opportunity to get out the house for curbside pickup.

And Amazon (AMZN) is building its own ecosystem that allows Echo users to shop through Alexa and have their Ring doorbells allow in-home delivery. There’s not much FedEx can do to combat these threats, as its technology infrastructure still needs to be expanded.

This could cause the company’s spending to counter any potential gains and set investors up for disappointment over the next five years.

Is FedEx Stock Overvalued? The Bottom Line

FedEx is a leader in global delivery and logistics, which put it in the right place for success when consumer habits shifted further in favor of online.

It far outpaced gains from its rival UPS, and it raised operating margins in the process. The company’s market cap hit an all-time high, but that doesn’t mean it can support it through the next five years as Amazon’s end-to-end technology threatens it.

As the world returns to normal, there are plenty of market factors that could hit the delivery company. It needs to onboard more workers and equipment for a busy holiday season. And it’s now competing with new delivery options that grew during the pandemic.

FedEx may not lose value, but it’s going to be hard-pressed to sustain its growth rate through the next two years. Invest with caution.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.