FedEx (NYSE: FDX) has been in the news a lot lately. On balance, most of the news has weighed on sentiment and the stock remains out of favour. However, long term prospects remain positive and most of the risks are now priced into the stock which is now 40% off its highs.
First of all, FedEx announced that it would no longer be delivering parcels for Amazon – news that many saw as a negative for the company. Then Chinese authorities announced they were investigating the company for misrouting Huawei parcels. At worst, this could result in FedEx being blacklisted in China. This resulted in Huawei filing a lawsuit against the U.S. government, claiming that having to police U.S. export policies was an unfair burden.
Finally, FedEx released its 4th quarter financial results last week. While analysts’ estimates were comfortably beaten, the company still posted an almost $2 billion quarterly loss. EPS were positive when adjusted for non-recurring items, but still showed a decline in margins. Investors were also disappointed that the dividend was not raised.
The Split with Amazon Is Not A Big Deal for Now
The results also highlighted the fact that while FedEx’s U.S. business is still doing well, the trade war with China and Brexit-related uncertainty is weighing on the global business.
On the face of it, the picture doesn’t look great for FedEx. But diving deeper shows that the potential upside now outweighs the risks. This applies to the split with Amazon too.
First, the reality is that Amazon only accounted for less about 2% of FedEx’s business. Moving away from Amazon may, in fact, be an opportunity when it comes to working with other e-commerce customers.
A lot has been made of Amazon’s own plans with regard to logistics. Yes, it is possible that once Amazon has a widespread delivery network of its own, it may decide to offer logistics services to other companies. But if that happens it will take years for Amazon to make a dent in FedEx’s business.
E-commerce Is a Growth Industry
While the trade war and Brexit may not be good for business right now, e-commerce isn’t going to stop growing. It’s going to continue growing in the U.S. and has even more room to grow outside the U.S. Right now, China accounts for a tiny part of FedEx’s business and this is certain to grow in the long term. As far as China potentially banning FedEx goes, China can’t end the trade war and ban FedEx.
Investors wanting exposure to the logistics side of e-commerce only have three significant global companies to choose from: DHL, UPS, and FedEx. DHL doesn’t operate in the U.S., the largest e-commerce market. UPS is trading at twice the market cap of FedEx with similar revenues, and unlike FedEx does have a lot of business tied up with Amazon. That leaves FedEx as the best entry to the industry.
The biggest risks for FedEx are a global recession, or the trade war continues. Neither scenario is impossible, but those risks are already in the price. FedEx is trading on a price to sales multiple of 0.61 and a forward earnings multiple of 11. That seems like a very reasonable price when you account for the risks.
The chart is showing strong support just above $150, which held despite all the uncertainty and bad news. If that level is broken the picture won’t look good, but, while it holds there seems to be a lot more room for upside than downside.