FedEx’s (NYSE: FDX) stock has largely recovered from its September lows and is poised to benefit from a few tailwinds, including a burgeoning e-commerce industry.

However, I believe that the obstacles and risks that FedEx faces outweigh any potential benefits from purchasing, leading me to recommend a HOLD in FDX.

Benefits

FedEx, as previously indicated, has a few advantages. Package volume is expected to rise as the e-commerce business expands.

According to Forbes, package volume tends to expand at a pace proportional to GNP, implying a relatively consistent increase in revenue in perpetuity.

Morningstar’s assessment of FedEx’s infrastructure suggests that it is more than capable of handling increased volume with minor adjustments.

FedEx Express package and freight revenue increased from 2021 to 2022 (package revenue increased from $32.48 billion to $35.69 billion, while freight revenue increased from $8.18 billion to $8.71 billion).

The total operating income rose by 6.5%. However, the average daily package volume declined by 7% from 2021 to 2022, while freight volume decreased by 5%. Improved yield per package boosted revenue.

However, this trend remains somewhat concerning to me since prolonged volume drops pose a danger to FedEx’s revenue base because there is only so much space for margin increases to compensate for volume decreases.

Logistics

FedEx’s infrastructure, as I mentioned before, is another promising aspect of the company’s business; their massive fleets and package sortation footprint function as a narrow moat.

FedEx has also demonstrated its longevity over the course of its long history. FDX has historically sustained growth despite financial crises and unusual conditions.

While they may have problems in the short term, I do not expect FDX to have many fundamental concerns in the long run.

FedEx’s valuation is reasonable. FedEx currently trades at a P/E and FWD P/E that are significantly lower than the sector, and its P/B is likewise excellent. FDX also has an EV/Sales ratio of.87 and a very promising Price/Cash Flow ratio of 5.42.

FedEx is worth $195, according to FactSet analysts. Given the proximity of FDX to this pricing, it is hard to argue that FedEx is cheap.

One other point to add is that FedEx pays a quarterly dividend of $1.15 per share, resulting in a 2.2% dividend yield.

Downside

FDX has its fair share of issues. The broad transition to business-to-consumer (B2C) shipping, as opposed to the formerly dominating business-to-business (B2B) shipping, has put pressure on package carrier profitability. Amazon’s (AMZN) development of last-mile capabilities indicates the possibility of new competition.

FDX has also suffered wage pressure and a tight labor market, both of which are expected to raise operating expenditures and eat into profits.

Finally, FedEx’s business is particularly susceptible to economic downturns, and macroeconomic issues such as a projected 2023 recession may have an immediate detrimental impact on FDX.

Let’s look at each of these things separately. Residential deliveries have a lower yield than business deliveries because the per-package margins do not compensate for the additional expense of many stops.

While FDX has lowered its cost per package in recent years, I expect B2C shipping will continue to account for a growing share of FedEx’s income, and sustaining profitability on such shipments would almost certainly necessitate significant investment on FedEx’s behalf.

Against the Competition

While there is no assurance, I believe Amazon will start leasing its last-mile shipping to shippers outside of its own network. If this happens, FDX and UPS (UPS) may lose market share, which would be disastrous for obvious reasons.

FedEx’s operational expenses climbed by 8% between 2021 and 2022, owing primarily to higher fuel costs and staff wage hikes. Given the current state of the labor market, I believe FedEx’s operating expenses will continue to rise, cutting into earnings for the foreseeable future.

FedEx’s September drop was triggered by the company’s acknowledgment that macroeconomic trends are acting as substantial headwinds for its delivery volume.

Given the likelihood of a recession due to a variety of macroeconomic variables such as inflation or high-interest rates, FedEx’s business is likely to suffer in the short term as volume shrinks.

Financial and Competitive Analysis

The statistics do not bode well for FedEx. Despite having a similar size to DHL and UPS, FDX is behind the other shipping behemoths in practically every other category.

First and foremost, consider profitability. FDX trails its competitors in terms of ROE and margins.

Looking deeper, FedEx’s net profit margin has actually dropped since its peak in 2021, and with a probable recession on the horizon, it is unlikely to recover quickly. FedEx’s earnings volume is also disappointing.

FedEx’s P/E ratio, while still affordable for the industry, is average among the transport behemoths, as is its EPS.

The competitive research reveals that many of FedEx’s alleged strengths, such as its affordable valuation, are not unique to FDX.

Analyzing this data shows that UPS, FedEx’s most important competitor, has the advantage in size and profitability despite trading at similar P/E multiples.

FedEx lacks a distinct and persistent qualitative advantage over its competitors. FDX is far from the industry leader, despite its transportation infrastructure serving as a kind of tight moat against new competition.

These characteristics, combined with FedEx’s somewhat inferior financial performance when compared to DHL and UPS, lead me to feel that it is not the finest investment in the business.

In Conclusion

Selling FDX would be an overreaction, in my opinion. Despite all of the disadvantages I’ve mentioned, FDX has enough upside potential to justify the hold. As previously indicated, FedEx’s transportation infrastructure, the rise of the e-commerce business, and the relatively reasonable valuation all contribute to the position’s strength.

Other considerations not highlighted in this piece that bode positively for FedEx include the final integration of TNT. However, when compared to its competitors, particularly UPS, I believe FDX falls short.

Furthermore, I perceive margins to be under pressure from a variety of sources, including expense increases and B2C shipping increases. When combined with unfavorable macroeconomic conditions, this makes me concerned about FedEx’s prospects in the short term.

As a result, I’m calling FDX, a HOLD.

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