Should You Buy Fed Ex Now?
Pandemic affects “virtually all revenue and expense line items.”
This was Fed Ex CEO Fred Smith after the company released its full year results on June 30th, 2020. Its fiscal year ended May 31 st, 2020.
When a CEO starts out a financial report conference call or press release with this you know things are going to get interesting.
One example of the huge coronavirus related costs for Fed Ex in the quarter was a $125 million charge for COVID-19 safety and health measures.
These extra costs are from buying masks for its employees. And extra cleaning in its facilities, planes, and delivery trucks.
Revenue fell from $69.7 billion last year to $69.2 billion this year. Or a fall of 1%.
This was a surprise since most businesses worldwide took an enormous hit in the first half of 2020 due to the coronavirus.
But this one number also doesn’t show the full story…
Operating income and net income took huge hits due to higher expenses related to the coronavirus.
Operating income fell from $3.12 billion last year to $2.42 million this year. This is a fall of 22.4% in the year to year period.
Operating income fell because the amount of money Fed Ex earned from every dollar of revenue fell from 4.5% last year to 3.5% this year due to increased costs related to the coronavirus.
This is bad. But net income was even worse.
Net income fell from $2.49 billion last year to $1.29 billion this year when not adjusting accounting. This is a fall of 48.2% year to year.
It’s working to offset this rise in expenses going forward by cutting costs for the rest of 2020 by more than $1 billion.
Net income fell because of increased expenses related to the coronavirus. But also, because it made $870 million in charges to impair goodwill and other assets this fiscal year.
When a company takes charges – or impairs – its goodwill or other assets it lowers net income.
This is another reason net income took such a large hit from the year to year period.
Fed Ex released a mixed bag of earnings with more bad than good news though.
This catches you up to now and the most important question for you… Should you buy its stock now?
Let’s find out.
Should You Buy Fed Ex Stock?
Its operating income and net income profits will take hits in the short to medium term as we deal with the continued and now increasing effects of the coronavirus .
That’s seen in the fall in operating profit margin from last year to this year. And, from the 50% hit in net income the company took.
This harms the company now and in the short term.
But what about over the last 10 years?
In the last decade, its operating margin fell from 19.7% in 2010 to the 3.5% it reported today.
This is a fall in operating profit margin of 82.2% in 10 years. Not good.
Operating profits measure the profits a company earns from its operations. If this is higher and/or rising it means the company makes more money from each dollar of sales.
And this allows the company to reinvest in growth, dividends, buybacks, etc.
Operating profit margin as a percentage of sales also increases the value of the stock over time too.
The inverse of these things is also true.
Fed Ex’s operating profit margin fell over the last decade due to increased competition – and lower pricing this causes – from UPS, Amazon, and others.
An 82.2% drop in operating margin in 10 years is not only not good… It’s terrible.
But all wasn’t bad for Fed Ex over the last decade…
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.
Again, not good.
What about its valuation?
As of this writing its selling at a P/E of around 31.
I look for stocks to have a P/E below 15 to consider for potential investment.
This means its overvalued by a large margin too.
And all these things combine to make the stock too risky for me to recommend today.
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.
If you’re looking to buy a stock check out our recent article – The Best Telehealth Stock To Own.
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.