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Can FedEx Deliver Strong Returns?

With the market moving up and down recently, it is important to sit down and understand your investments. If you own poor companies, it may be time to look for fundamentally sound investments, but if you own the right companies this is just short-term noise which should not have an impact on your investments over the next 3-5 years, says Brent Wilsey, President, Wilsey Asset Management. In fact, he adds, this short-term volatility could create a buying opportunity for good quality companies. One company which Wilsey has been intrigued with for some time and due to the recent pullback presents elevated interest is FedEx (FDX). Here are his comments:

“Given a strong economy and an increasing amount of online spending, FedEx could be in a prime position to take advantage of this changing retail environment. The current price of $226.18 has risen above its 52-week low of $214.17, but it remains well below its 52-week high of $274.66. The company is in the delivery services industry and the transportation sector.

 The valuation measures look encouraging for FedEx. The Current P/E of 18.8 is the only negative for the company as it is above the industry average of 16.4. Current Price/Sales of 0.9 is favorable against the industry average of 1.1; Price/Tangible Book Value of 4.7 is inexpensive compared to the industry average of 11.0; and Price/Cash Flow of 9.2 is also below the industry average of 14.4.

Investors receive a small dividend of 1.2%, but FedEx uses only 15.9% of earnings to pay out that dividend. This gives me great comfort in the stability of this dividend and provides hope that the company could increase the dividend over the next few years.

FedEx has seen solid growth with sales increasing 10.3% over the last 12 months and EPS rising 10.6% over the same time frame.

The balance sheet looks good with a current ratio of 1.3 providing the company ample liquidity and a Debt/Equity of 88.4% remains below the industry average of 118.44%. With closer look at the numbers we see Long-Term Debt/Equity of 79.5%, this means about 9% of the company’s total debt will mature over the next 12 months. In this rising rate environment, I am cautious of companies which have debt coming due over the next few years which will need to be refinanced. It will most likely come at higher rates which will increase interest expense and squeeze margins. FedEx has the liquidity and cash flow to cover the debt over the next 12 months, but I would recommend looking closer at their other notes to see when they mature.

If we look out to May 2020 estimated GAAP EPS of $19.77 would give us a target sell price of $326.21. This provides and attractive estimated return of 44%.

While we like much of what FedEx has to offer there are some points we recommend researching further. First would be the debt maturity we mentioned earlier. Next, the company likely has large expenses related to oil given the nature of its business. We would like to understand what these expenses look like for the company and how it plans to handle rising fuel costs. Finally, the United States Postal Service (USPS) has proposed a 9.3% increase on packages over a pound and a 12.3% increase for lighter packages when FedEx uses its parcel select service. It is important to understand how much this service makes up of FedEx costs and how a potential price increases will affect its bottom line. While the numbers look good, it is always important to take a closer look at an investment before jumping in.”

Editor’s Note: San Diego-based, Wilsey Asset Management has built a reputation for effective investment management and expert financial guidance along with financial planning services nationwide. To find out more about the services the firm offers visit www.wilseyassetmanagement.com.

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