2023-06-20 11:22:19 ET
Summary
- Contrarian investing can be a profitable strategy, as seen with FedEx's recent stock performance despite financial struggles.
- FedEx shares look cheap on a cash flow basis compared to its competitor, United Parcel Service, and on an absolute basis.
- Investors should monitor FedEx's upcoming earnings release today for potential changes in the company's outlook.
There are several different types of investment strategies that people utilize. One of these, one that I believe to be one of the best, is referred to as contrarian investing. When the market is moving in one direction, sometimes the most profitable thing to do is the exact opposite. One really good example that I could point to where this has worked out in recent months involves logistics giant FedEx (FDX). Even though the company has seen its financial condition worsen over the past few quarters, shares have rocketed higher after initially plunging late last year. Even with this move higher and the pain the company is experiencing, the stock looks very cheap on an absolute basis and looks attractive relative to the competition. So despite this move higher that shares have enjoyed, I would argue that the company still warrants a solid 'buy' rating at this time.
Contrarian investing done right
Some of the best investments that I have made over the past year or so have been contrarian investments. Even though I sold out far earlier than I should have, the best such example can be seen by looking at Facebook parent Meta Platforms ( META ). I nearly doubled my money buying stock in it after shares of the enterprise plunged over 70% late last year. The market was concerned by declining profitability as management invested billions of dollars into its metaverse operations with little to nothing to show for it. Another company that I currently own shares of that I initially started acquiring in March of 2022 is automotive retailer Group 1 Automotive ( GPI ). I have added to that position over time. And today, it accounts for over 15% of my portfolio. And while the market is up 9.6% since then, my shares have generated upside of 34.3%. There are a couple of other examples I could point to. But you get the idea.
One company that I now regret not buying but that I did take a favorable stance on is FedEx. On September 15th of last year, shares of the company plunged 23% as management withdrew most of the financial guidance for the 2023 fiscal year. Significant amounts of economic uncertainty played a role in this. And that same uncertainty also led to weak financial results for what was then its most recent financial quarter. In an article that I published only one day later, I rated the company a 'buy', with my rating based on an attractive operating history and the fact that shares of the company were now looking cheap. I said that near term pain might still exist for shareholders. But in the long run, the company had attractive prospects. Since then, things have gone remarkably well. Shares of the company are up 47.6% compared to the 13.9% seen by the S&P 500 over the same window of time.
This return disparity does not change the fact that the company has experienced some pain. To see what I mean, we need only look at data covering the third quarter of the company's 2023 fiscal year. This is the most recent quarter for which data is available. Revenue for that time came in at $22.17 billion. That's down 6.2% compared to the $23.64 billion the company generated one year earlier. The vast majority of this downside in revenue was driven by a $959 million decline in sales associated with its FedEx Express segment. In the domestic market, average daily package volume for the company came in at 2.85 million. That was down substantially from the 3.31 million reported one year earlier. Internationally, average daily package volume for domestic-bound packages dipped from 1.87 million to 1.81 million. Meanwhile, International export package volume declined from 1.08 million to 981,000. Such a drop seems to have been driven in large part by weaker economic conditions. But that's to be expected given all that has transpired with rising interest rates and inflationary pressures.
This decline in revenue brought with it a drop in profits as well. Net income of $771 million was substantially lower than the $1.13 billion reported one year earlier. Operating cash flow actually increased from $2.25 billion to $2.28 billion. But if we adjust for changes in working capital, we would have seen this number fall from $3.11 billion to $2.84 billion. And over that same window of time, EBITDA for the company plunged from $2.63 billion to $2.30 billion.
As you can see in the chart above, financial results experienced during the third quarter of 2023 were not a one-time event. The same issues that affected the third quarter of the year also affected results for the first nine months of the year relative to the same time last year. Management still refuses to provide much in the way of guidance, except to say that adjusted earnings per share will be between $14.60 and $15.20. But they did say that there still remains a great deal of uncertainty regarding the global economy that they view to be slowing, global inflation, geopolitical challenges, and more.
If we use the midpoint of guidance provided by management, we would expect net income to come in at around $3.77 billion this year. Annualizing the results experienced for the first nine months of 2023 relative to the same time last year, we would get adjusted operating cash flow of $11.70 billion and EBITDA of $8.89 billion. These numbers are all a bit lower than what the company saw during the 2022 fiscal year.
Using these metrics, we can easily value the enterprise. As you can see in the chart above, using forward estimates for 2023, the company is trading at a price to earnings multiple of 15.8. The price to adjusted operating cash flow multiple is 5.1, while the EV to EBITDA multiple stands at 8.4. The chart also shows pricing based on data from 2022. In each of those instances, shares look even cheaper. Relative to its big competitor, United Parcel Service ( UPS ) shares of FedEx look quite cheap using two of the three metrics. This can be seen in the table below.
Company | Price/Earnings | Price/Operating Cash Flow | EV/EBITDA |
FedEx | 15.8 | 5.1 | 8.4 |
United Parcel Service | 14.5 | 12.8 | 13.4 |
Keep an eye on earnings
Every investor would be wise to continue to monitor their investments as time goes on. After all, when the facts change, our opinions should also change. I view a significant change for the worse regarding FedEx as very unlikely. But in this world, anything can happen. If there is going to be a game-changing shift in the picture for the business, it very likely will occur during a regularly-scheduled earnings release. Fortunately for investors, the next such release is planned for June 20th, and it will cover the final quarter of the company's 2023 fiscal year. Leading up to that point, there are some important things investors should keep in mind.
For starters, analysts currently expect revenue weakness to remain in-play. Overall sales are forecasted to be $22.66 billion. That would represent a decline compared to the $24.39 billion in revenue the company reported in the final quarter of its 2022 fiscal year and would likely be driven by continued pressure on the number of packages shipped per day. Earnings, on the other hand, are forecasted to come in strong at $4.84 per share. That would be more than double the $2.13 per share the company reported the same time last year. Achieving this target would result in net income of $1.23 billion, which would be a nice improvement over the $558 million the company reported in last year's final quarter. Management has not, unfortunately, provided estimates regarding other profitability metrics, but these should also be top-of-mind for shareholders. For context, operating cash flow in last year's final quarter was $4.43 billion, while adjusted operating cash flow totaled $4.29 billion. EBITDA came in substantially lower at $2.11 billion.
Takeaway
The way I see it, FedEx and many other companies across many other industries probably are going to experience some pain over the next few quarters. But even with that pain, shares look very cheap on a cash flow basis. This is true both relative to UPS and on an absolute basis as well. Part of contrarian investing is recognizing a value when you see it and also recognizing that, while pain might persist in the near term, any company that is a major player in its space and that benefits from long term economic growth, is a prime prospect. Even though FedEx has seen a nice move higher, the stock still looks cheap enough to me to warrant a soft 'buy' at this time.
For further details see:
FedEx Q4 2023 Earnings Preview: Still Appealing After Soaring Higher