Transportation stocks had been keeping pace with the strong S&P 500 through February this year. Market-watchers like to see this cyclical niche of the domestic equity market lead during bull markets to help confirm the uptrend. The iShares Transportation Average ETF (IYT) began to lose absolute and relative steam toward the tail end of Q1, however. It indeed portended a small correction in the S&P 500. One of the ETF’s largest components, however, bucked the trend.
Following a strong Q3 2024 report issued in March and with impressive growth forecasts in place, I have a buy rating on FedEx (NYSE:FDX). I see the $66 billion Air Freight and Logistics industry company as a compelling GARP play today.
FDX Leads the Transports ETF in 2024
According to Bank of America Global Research, FedEx Corp provides a portfolio of transportation, e-commerce, and business services under the FedEx brand. The company operates in four segments: FedEx Express (51% of revenues), FedEx Ground (36% of revenues), FedEx Freight (9% of revenues), and FedEx Services (3% of revenues). FedEx offers a variety of transport services to more than 220 countries, and it is a complete global service provider of transport and supply-chain solutions.
Back in March, FDX reported a solid set of third-quarter numbers. Q3 non-GAAP EPS of $3.86 handily topped estimates of $3.48, though revenue of $21.7 billion, down 2% from year-ago levels, fell shy of consensus. While the top line was soft, the firm’s cost savings program was the focus – a 13% y/y jump in net earnings puts the company on track to hit its $1.8 billion expense reduction goal from its DRIVE program in FY 2024. More margin-focused initiatives are planned for the years ahead.
Looking ahead, the management team narrowed its 2024 EPS target and noted that Express margins are expected to drop slightly this year while Ground margins should be positive. Freight margins may also inch lower from the percentage last year. The Wall Street reaction was very positive – shares jumped 7.4% during the following session. Right now, the options market has priced in a 4.8% stock price swing following the June earnings date while analysts expect $5.38 of operating EPS, which would be up 9% YoY.
On valuation, analysts at BofA see earnings having risen close to 20% this year (its FY 2024 is about to close) while per-share profits are seen rising at a solid pace through the out year and 2026. The current Seeking Alpha consensus forecast shows a similar growth trajectory, with operating EPS potentially topping $21 in the coming 12 months.
Revenue will likely come in lower from year-ago levels in 2024, but a positive inflection is expected over the coming two fiscal years. Dividends, meanwhile, are projected to rise to $5.40 next year and then hold steady. With a low EV/EBITDA ratio and solid free cash flow, the recent bumpy earnings ride may be about over.
FedEx: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts
FDX has historically traded with a mid-teens multiple. Its 5-year average forward non-GAAP price-to-earnings ratio is slightly below that. If we assume $21 of operating EPS over the coming 12 months and apply a 15x P/E, then shares should trade near $315, making the Industrial sector stalwart undervalued today.
FDX: Favorable Valuation Metrics Considering EPS Growth Through FY 2026
Compared to its peers, FDX features a neutral valuation rating, while its recent growth trajectory has been weak. But with a cost-cutting program underway and a focus on margin strength, earnings are forecast to increase substantially by 2026.
As it stands, profitability trends are very strong, evidenced by an A+ Quant Factor Grade by Seeking Alpha, and EPS revisions from the sell side are coming around in a positive way. Finally, share-price momentum has been lacking, but I will detail some green shoots on the chart later in the article.
Competitor Analysis
Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q4 2024 earnings date of Tuesday, June 25 with a conference call immediately after the numbers cross the wires. You can listen live here. No other volatility catalysts are seen on the calendar.
Corporate Event Risk Calendar
The Technical Take
Following strong Q3 2024 results back in March and with a decent valuation considering double-digit EPS growth ahead, can FDX deliver technically? I see reasons for optimism. Notice in the chart below that shares have traded with a pair of gaps in mind lately. First, the stock filled a downside gap from December 2023 with near precision in the wake of the earnings-related bump in March. But the stock then wavered, dropping from $291 to a low of $262 within a matter of weeks, filling the earnings gap.
Today, shares seem to have successfully defended a confluence of moving average support points. Both the short-term 50-day moving average and the long-term 200dma are just below $260 – the pair of trend indicators are rising, too. What’s more, a bullish golden cross pattern took place earlier this month, whereby the 50dma crossed above the 200dma. With these bullish factors in play, I see FDX lifting back towards its multi-year high of $291 in due time.
Bigger picture, there’s long-term support in the $210 to $217 zone and a large amount of volume by price from $192 up to $270 which should provide a cushion if we see a more pronounced pullback.
FDX: Minding the Gaps, Long-Term Support Holds
The Bottom Line
I have a buy rating on FedEx. I see the domestic large cap as undervalued with a very impressive growth outlook while its technical situation is solid.
Mike Zaccardi, CFA, CMT
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