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Fed Ex Rises 11.7% – Was I Wrong To Not Buy?

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FedEx logo and symbol, meaning, history, PNG

Yesterday I told you that Fed Ex announced a bit of a rough fiscal year end annual report.

To read my full thoughts on the company us the link above. But I ended the article saying this…

Conclusion

Fed Ex just reported a mixed but mostly negative full year 2020 fiscal year results. This due to higher expenses and charges related to the coronavirus

These poor results should continue for a while as new coronavirus cases explode nationwide.

Its doubled revenue in the last decade.

But its earning 82.2% less in profits.

And its overvalued right now.

I’d recommend staying away from Fed Ex shares for the foreseeable future for the reasons above.

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The day after it released these subpar results Fed Ex stock finished its best day since 1986 up 11.7%.

So, was I wrong saying you shouldn’t buy Fed Ex?

Before I answer that, I need to tell you why the stock rose so much today.

Why Did Fed Ex Stock Skyrocket Today?

Because people buying Fed Ex stock today aren’t focused on the long-term prospects of the company or the deterioration of its profitability in the last decade.

Every article you read today about Fed Ex shares rising focusing on how well the company performed in the face of the coronavirus pandemic.

And its performance in the face of these historic circumstances is admirable.

But that doesn’t mean its performance was good. And it certainly wasn’t great as the huge single day rise in its share price showed.

Revenue only fell 1% in the year to year period.

But operating profits fell by 22.4% and net profit fell 48.2% in the year to year period.

The value of company’s stock isn’t based on revenue growth – outside of the tech arena – its based on profitability and cash flow production over the long term.

Growing profitability margins over time lead to higher values of the company and higher share prices generally.

And lower profitability margins lead to lower values of the company and lower share prices over time generally.

But the bigger issue to me is the 82.2% fall in its operating profits margin in the last decade.

I highlighted that in this section from the previous article on Fed Ex

From 2010 to today its revenues grew from $34.7 billion to $69.2 billion. This is an increase of 100% in 10 years.

Great growth right?

Not really because of its enormous fall in operating profit margin.

In this same time as its revenue doubled but operating profit margin fell dramatically.

This leads to operating income falling from $6.8 billion in the full year 2010. To $2.42 billion as of its release today.

In other words, Fed Ex is now running twice as fast – revenue growth. And it’s taking almost 4X longer to get there with its 82.2% drop in operating profit margin during this time.

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To further illustrate this point imagine you own a pizza business.

You must pay for the building, employees, ingredients for the pizza, etc. other costs to operate the business. At the end of year 1 and all these expenses you generate an operating profit of 19.7% at the end of the year which is fantastic.

But slowly over the next decade you decide to double your business to two pizza restaurants.

Meanwhile you don’t keep your costs under control due to the growth. And now there’s also new competitors in your neighborhood. To keep competing well with them you must lower your prices.

Both things lower your profit margin. Now by the end of 10 years you own two pizza restaurants. But instead of 19.7% operating profit margins now they’re 3.5%.

In that time, you went from earning $6.8 million in operating profits from one restaurant. To only $2.42 million a decade later.

You’ve expanded, but was it worth the 10 years of time and the enormous amount of effort over the last decade?

This is exactly what Fed Ex did over the last decade… It doubled its revenue, its costs rose, it had to lower prices due to new competition, and its profitability cratered from $6.8 billion in 2010 to $2.42 billion this year.

Fed Ex is working 2X harder than it was a decade ago while seeing 4X less results.

I don’t know anyone who would want that in their personal lives. So why do many want it in their investments?

I don’t. And I recommend you don’t either.

But even in the face of this massive deterioration in profits over the last decade and Fed Ex’s admirable but still not good results yesterday, more than 10 analysts boosted their rating on Fed Ex stock in just the 24 hours since the release of its annual report.

This is a large reason why the stock rose so much today. And none of this makes sense.

To further illustrate this point Fed Ex stock is still down 43% from its all time high of $274.32 on January 19th, 2018. Even after these supposed great results that sent share prices rising 11.7% in one day.

Why?

Because its profitability margins dropped so much in the last 10 years. And profitability margins are what drive the value up or down of stocks over the long term.

I stand by telling you to stay away from buying Fed Ex Stock now for theses reasons and the others mentioned in the first article on the company.

The following quote from the Great Warren Buffett perfectly illustrates my full thoughts on situations like this that happen in the short term.

“You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right – that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.” Warren Buffett

Unless otherwise noted, almost everything on this site is geared toward building your wealth over the long term. And just because something goes up or down a large amount in the short term doesn’t change that.

Click here to learn the 4 Reasons The Markets In For A Crazy Week.

 

 

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

 

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