2 More Reasons To Avoid Fed Ex
Two months ago, I showed you several reasons to avoid Fed Ex stock in 2 different articles.
Today I tell you 2 More Reasons To Avoid Fed Ex after it released its most up to date quarterly financials.
You can read the new article below. And the full previous articles using the links above.
Here’s a quick recap of why I said you should avoid Fed Ex, so you understand where I’m coming from.
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 31st, 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 – it’s 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.
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.
This is from the second article…
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.
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.
This thesis to continue avoiding Fed Ex was partially proved out on September 15th, 2020 when it announced its most up to date quarterly earnings.
Revenue in the year to year quarter was up 13.6% to $19.3 billion.
Operating profits in the year to year quarter were up 62.2% to $1.59 billion.
And net income in the year to year quarter was up 67.8% to $1.25 billion.
Impressive results due to increased demand for deliveries in the quarter.
But none of this fixed the key issues from the previous article…
- That UPS earns higher profits than Fed Ex.
- And Fed Ex is enormously overvalued.
Both are still true after these updated quarterly results.
In fact, Fed Ex’s valuation is even worse now than it was in early July when I wrote the other 2 articles on it.
Its P/E is 48.3
Its P/CF is 12.2.
And its forward P/E is 22.2.
For these 2 reasons, continue avoiding Fed Ex stock… Because UPS is a better investment.
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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.