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FedEx Is 38% Undervalued And Likely To Deliver 18% Long-Term Total Returns

Posted On August 21, 2018 2:20 pm
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Risks To Consider

While FedEx is a low risk blue chip, especially at these attractive valuations, there are still some risk to keep in mind before investing.

The first is that FedEx’s business is cyclical and thus tied to the health of the global economy. Fortunately management expects 2018 US GDP growth to be a robust 2.9% and global economic growth to come in at 3.2%. In 2019 growth is also expected to be strong, 2.7% in the US and 3.2% globally. However, at some point a global recession will happen and the company’s sales and profits might decline. It’s important to keep in mind that the long-term growth forecasts discussed in this article are for smoothed out or compounded annual growth rates (CAGR). This means that FedEx is likely to achieve them over time but in any given year growth can be lumpy or even negative.

That’s partially because the company’s margins can be negatively affected by rising input costs, primarily fuel (up 22% in 2018). Currency risk (33% of revenue from overseas) is also a potential source of sales and earnings volatility. When the US dollar appreciates against rival currencies (as it’s doing now thanks to rising US interest rates) foreign sales and earnings translate into less dollars creating short to medium-term growth headwinds. Fortunately currency fluctuations tend to cancel out over time so this is not a large long-term risk to the investment thesis.

Execution risk on acquisitions is another potential thing to be aware of. While management has a great track record of making smart strategic and bolt on deals, every acquisition comes with the risk of overpaying. In addition large purchases like TNT Express can be complicated and take many years to integrate into the company’s overall supply and distribution chain. And expected synergistic cost savings, which often determine how profitable a deal proves to be, are also not guaranteed.

In addition it should be pointed out that FedEx isn’t guaranteed to fully capitalize on the continued growth of e-Commerce. That’s because the US Postal Service competes with it in online delivery as does Amazon, which is investing in its own delivery business. Fortunately the size of the e-Commerce fulfillment market (which is growing at double digits for the foreseeable future) is big enough to ensure that FedEx will see continued sales and earnings growth in the coming years. But those growth rates may end up smaller than analysts and investors expect.

Finally, investors should be aware that Fred Smith, the founder, Chairman and CEO is currently 73 and the company’s mandatory retirement age is 75. This means that in two years FedEx will no longer be a founder led company. Fortunately there is little risk that the company’s new leadership will run FDX in a different and less efficient manner. That’s because FedEx has a deep managerial bench to replace Smith. For example David Bronczek, the current COO, is likely to replace him as CEO. Bronczek spent 16 years as CEO of the Express Group, the largest division in the company. Replacing him as CEO of Express was David Cunningham, a 30 year company veteran. Basically this means that while FedEx is due for major leadership changes soon, the highly experienced management team will be able to promote from within and thus maintain the same lean and shareholder friendly corporate culture.

Bottom Line: This Fast Growing Dividend Blue Chip Is A Screaming Buy Right Now

Even with the stock market now in its 10th year of a bull market Grade A dividend growth blue chips can still be found at mouthwatering valuations. FedEx, a fast growing wide moat industry leader, is one such stock. Thanks to numerous competitive advantages including: a world class management team, wide moat, enormous economies of scale, and strong long-term international growth runway, this company is likely to grow its dividend at double digits for the foreseeable future.

And with FedEx being one of the most undervalued blue chip dividend stocks you can buy today, its not just a good buy, but a screaming buy. That’s because its long-term total return potential of about 18% means that FedEx is likely to not just be one of the best blue chip income investments of the next 10 years, but one of the best performing stocks period.

About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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