The report is commissioned to evaluate the investment potential of leading American courier service company, FedEx Corporation. As part of this report, we will be discussing the trends in the financial statements of the company, which will be followed by a comprehensive ratio analysis section where we will be putting the financial figures of past two years under the microscope of financial ratios. In order to widen the scope of our analysis, we will also compare the trends in the financial ratios with that of two leading competitors of the company, United Parcel Services (UPS) and Deutsche Post (DHL).
Important to note, we have not framed the report with the mindset of a speculator looking for short-term gains. Rather, the whole report is based on the investment theory of fundamental analysis where the final recommendation will be based on industry analysis, company analysis, and intrinsic stock price valuation. In addition, we have primarily used annual report of all the three companies stated above, and few other external sources to complete this report. All the sources used will be cited along with the subject matter and a reference list will also be provided at the end of this report.
2) About the industry
FedEx Corporation competes in Global Courier and Mail Delivery Industry. The industry originated ages back with the growth of human civilization and the need for transportation of information and materials. With the nations around the globe opening their doors and aggressively working on globalization, the courier and mail delivery industry has gained significant relevance, and over the past few decades, and primarily with the fueling with of e-commerce industry, many new companies have entered the market. This has turned the industry into a highly monopolistic structure where each market participant offering differentiated services to the customers ranging from quick delivery to cost effective and safe delivery. During 2010-14, the industry registered annualized growth of 2.1%.
3) About the company and related success factors
Founded in the year 1971 and headquartered in Memphis, Tennessee, FedEx is an American global courier deliver service company that provides its services both domestically and internationally. By the end of 2014, the company had a total employee count of 325000, and operated four segments, FedEx Express, FedEx Ground, FedEx Freight and FedEx Services. The success of the company lies on the lack of balance between high labor wage expense in courier industry (during 2014, the industry spent $0.09 of capital for every dollar on labor expenses), and the need for an updated and fast moving infrastructure of aircrafts.
FedEx Corporation, being operating in monopolistic industry differentiates its services from the other competitors, and the efficient services under the cloud of cost efficiency allows it to gain a little competitive advantage over competitors such as UPS and DHL. By the end of 2014, the company was rated as world’s no. 1 transportation provider delivering 3.5 million packages daily in more than 220 countries.
4) Financial Statement Review
Analyzing Income Statement
Finding the trends in the income statement of the company will be a good base for us to start with the financial analysis of the company over the period of past two years. As noted from the income statement of the company, FedEx Corporation did achieved an appreciable growth in the revenue figures, amounting to 3.76% in 2013 and 2.90% in 2014. Although the increase in revenue figures was less than what the company had attained in the year 2013, however, the financial performance during 2014 was an appreciable effort as during the year, FedEx was successful on its cost-control mission and was able to control its operating expenses. This resulted in an increase in the operating income of the company by 35.08%, rising from $2551 million in 2013 to $3446 million in 2014. Moreover, the impact of increased operating income was well witnessed in the bottom line profits of the company, which during 2014 increased by 34.33%, relative to a pessimistic performance in 2013 during which the company witnessed a fall in the net income figures by 23.17%.
Overall, investors will be ecstatic to witness the bounce-back trend of FedEx with increase in revenue and profit figures. Important to note, referring to the income statement and related financial notes, we did not found any unusual item or transaction held by the company.
-Notable Statement by the company executive
In regard to the cost-management drive, the chairman, Federick Smith, in his letter to the shareholders, explicitly disclosed that the company was successful in controlling its operating cost which was transformed into an outstanding financial performance during 2014.
Analyzing Balance Sheet
Next, in order to find out the trends in the financial position of the company, we analyzed the balance sheet of the company, and found some pesssimistic trends, especially in relation to the working capital position. During 2014, the cash position of the company plummeted by 41%, while the overall current assets base declined by 14.11%. In contrast, the company also managed to decrease its current liabilities by 7.61%. However, with a 41% decline in cash and 14.11% decrease in overall current asset position, the liquidity position of the company is significantly affected this year.
Another concern was the long-term debt position of the company which increased by 72.91% during the year, however, the company declared that the majority of the existing cash position and the cash raised through debt sources was used to honor the share repurchase agreement(including repurchase agreements) worth $4857 million amid the strong believe in the future prospects and potential of the company
-Notable Statement by the company executive
The chairman of the company, Federick Smith, declares in his statement that the stock repurchase activity was one of the notable decision of the company this year, and this show the belief of the management in the future long-run potential of the company, and a commitment to deliver value to the shareowners.
This is the core section of our report where after a brief analysis of the industry and company trends, we will now turn meticulous and analyze the past two year financial ratios of FedEx, and two of its close competitors, UPS and DHL. Important to note, while we will be including ratios for the competing firms, the main objective will be evaluate the ongoing trend of FedEx only, and what changes in the financial items has led to such trends. The calculations and discussions are bifurcated into multiple section to assist the reader and to include comprehensiveness in our work:
- Revenue, Total Income and Profitability
i)Trends in Revenue Figures
During 2013, the revenue figures surged by 4%, and the increase was primarily driven by increase in the revenue figures at FedEx Express and volume growth at FedEx Ground. In contrast, the revenue growth during 2014 was restricted to 2.80% with negative trend in the transportation segment, while the revenue increase at FedEx Ground segment and FedEx Freight were the prime driver of the revenue increase. The company acknowledge that the demand shift from its priority international services to our economy international services dampened revenue growth at FedEx Express during 2014.
In comparison, UPS lead the pole position with revenue growth increasing from 2.42% in 2013 and 5.02% in 2013, while DHL which witnessed a negative trend in revenue of -0.76% in 2013, managed to regain the positive trend in the revenue figures with the increase of 2.80%.
ii)Trend in Profitability
With FedEx exclusively focused on cost-management during 2014, the company was able to transform its efforts into increased profitability. During 2013, the operating margin of the company was 5.8% which it managed to increase to 7.9% in 2014, amid decreased proportion of operating expenses that plummeted by 1.8% this year. FedEx cites these results as an outstanding achievement for the company and the shareholders.
In contrast, UPS seemed to be struggling with its operating expenses, as despite of increase of 5.02% in its revenue figures, the operating margin of the company decreased from 12.7% in 2013 to 8.5% in 2014. On the other hand, DHL Logistics which recorded a growth of 2.80% in the revenue figures, recorded a fairly constant operating margin of 1.6% during 2013 and 2014.
Return on Investment
FedEx has been following a regular dividend policy where since past five years, it has been increasing the payout by $0.04 per share. During 2014, the company declared a cash dividend of $0.60 per share relative to $0.56 per share during 2013. As part of this payment, a total amount of $187 million was spent on payment to the shareholders.
-Profitability Multiples: ROCE and ROE
i)Return on Capital Employed: Net Income/ (Total Assets-Current Liabilities)
Return on Capital Employed indicates how efficiently the company is deploying its capital resources to earn sustainable returns. Below is the ROCE multiple for FedEx and its two core rivals for the period of two years:
Referring to our calculation in the excel file and the table above, we witnessed that while FedEx is having least multiple amongst its competitors, it is the only one to manage increasing trend during 2014. On other hand, while DHL witnessed marginal fall in its ROCE multiple from 9.79% to 9.04%, the biggest struck was witnessed in the ROCE trend of UPS as the multiple declined from 15.03% to 11.30% during 2014, thus confirming poor efficiency of the management to use their capital resources.
ii)Return on Equity: Net Income/ Total Equity
This profit multiple indicates the level of returns being earned by the company on the funds invested by the equity holders. Below is the ROE multiple for FedEx and its two core rivals for the period of two years:
Referring to the above table, we might get easily duped that all the three companies, FedEx, UPS and DHL are able to generate better returns on its equity capital. However, the real scenario is surfaced after a meticulous observation of the balance sheet of all these companies. As for FedEx, the increase in multiple from 8.97% to 13.73% was primarily driven by decrease in equity base that went down by 12.19%. However, since the treasury stock purchase was the main deducting item in shareholder equity, we can rate the increase as sustainable.
On the other hand, for UPS, the enormous increase in ROE multiple was also sourced from decrease in the shareholder equity that plummeted by 66%. This indicates that the shareholders are losing confidence in the company, and do not see the stock as a valuable investment. Similar was the situation with DHL, which despite of negative growth in net income, experienced a rise in the ROE multiple because of a decline in the shareholder equity, indeed an unsustainable point.
Operating in logistics industry requires an ownership of productive non-current assets, and just like any other company in the industry, FedEx Corporation also owns non-current assets worth $19550 million(excluding goodwill and related assets) which it deploy into its operations.
-Asset Turnover Ratio
This asset management multiple indicates how efficiently an entity use its asset base to generate the revenue figures. Referring to the figures in the above table, we can see that during 2014, the asset turnover ratio of FedEx Corporation increased from 1.32 to 1.38. The increase was largely sourced from 2.8% rise in the revenue figures while a 1.48% decrease in the asset base was also the primary driver of this surge.
In contrast, the nearest competitor, UPS also witnessed a positive trend with ratio multiple increasing from 1.52 to 1.64, which was driven by revenue increase of 5.04%, while the asset base plummeted by 2.08%. On the other hand, DHL did faced a declining asset turnover ratio from 1.55 to 1.53.
i)Current Ratio: Current Assets/ Current Liabilities
This ratio indicates the amount of current assets an entity owns relative to its current liabilities. In short, this ratio multiple indicates the level of working capital position of an entity which assist the analysts in decoding the ability of the company to honor its short-term obligations. Referring to the above calculation, we can witness that during 2014, the current ratio of FedEx Corporation declined from 1.96 to 1.82, amid a greater proportion fall in the current assets that declined by 14.11%, while the current liabilities declined by 7.61%.
As far as the solvency position of competitor companies is concerned, UPS also witnessed a declining trend with the fall in the current ratio from 1.88 to 1.37, while the current ratio of DHL increased marginally from 1.02 to 1.04 only.
ii)Acid Ratio: (Cash +Receivables)/ Current Liabilities
Acid Ratio is a stringent measure of liquidity assessment of a company, and in order to arrive at a concrete conclusion relating to solvency position of the above three companies, we have calculated the said ratio. Referring to the above table, we can see that during 2014, FedEx witnessed negative trend with ratio multiple declining from 1.73 to 1.58, with decrease in cash position being the primary reason for the downfall.
Similarly, UPS’s acid ratio also soared down from 1.65 to 1.15, confirming a significant struck to the liquidity position this year. However, we did witnessed a very marginal improvement in acid ratio multiple for DHL which surged from 0.99 to 1.01, but still below than its competitors.
Till now, we have achieved a comprehensive analysis of the financial trends of FedEx Corporation, however, since the objective of this report is to provide an ethical and fundamental based recommendation to the readers, we extended our analysis further and calculated the intrinsic valuation of the company using the Dividend Discount Model (DDM) and PE Ratio based valuation. While the complete calculations are included in the appendix, the final outcome of the valuation model is stated below:
i) Dividend Discount Model(DDM)
i) Year 1 growth rate has been averaged using RR and ROE multiple for past 5 years
ii) Terminal growth rate has been calculated using Gordon Growth Model.
iii) Year 2, 3 and 4 growth rates has been calculated using interpolation between growth rates of year 1 and 5.
Ironically, while the trends in the financial statements and the financial ratios were somehow inclining us to issue a favorable recommendation, the outcome of the valuation models have turned us sceptic. As we can notice from the above valuation model, the stock is currently overvalued, and is likely to fall back to its intrinsic valuation. This makes the stock a candidate for short-sell for our speculative investors. However, since we already indicated in the introductory section that the final conclusion of the report will based on all the fundamental aspects, therefore, let us compile all the noted trends to come up with an ethical recommendation for our investors.
At the end of this report, we issue a buy recommendation for FedEx’s stock. As you may notice that both the valuation models indicate that the stock is overvalued, however, other aspects related to expected growth of the industry in coming years, and optimistic trends in the financial ratios, provides an indication that the stock is an attractive buy, and will provide lucrative returns to the investors in the long-term. In addition, a record stock repurchase activity by the management, is also a core point which guides us to issue a buy recommendation for the stock. Our recommendation is also in consent with the other market analyst following the stock:
FedEx Corporation, (2015). Annual Report 2014. Letter to Shareholders. FedEx Corporation, p.2.
FedEx Corporation, (2015). Annual Report 2014. Consolidated Statement of Income. FedEx Corporation, p.42.
FedEx Corporation, (2015). Annual Report 2014. Consolidated Balance Sheet. FedEx Corporation, p.44.
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