Krause Fund Research Spring 2021 March 26th, 2021 FEDEX CORPORATION (NYSE: FDX) Stock Performance HighlightsRATING : BUY INDUSTRIALS Analysts: Carson Steffen Drake Evans Dee Le Target Price: $342-$389 [email protected] [email protected] [email protected] Investment Thesis Company Overview We recommend a BUY rating for FedEx Corporation. FedEx Corp. is a global leader in providing integrated Drivers of Thesis: freight & logistics services, based in Memphis, ❖ Currently monopolizing the Sundays and holiday Tennessee. They operate under four main segments: shipments. FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services. Their FedEx Express unit is the world ❖ Strong e-commerce growth during and after the largest transportation provider to 220 countries and COVID-19 pandemic elevates the demands for territories. FedEx maintains a fleet of over 680 aircrafts shipping delivery services. and 183,000 vehicles. About 70% of their revenue is ❖ Loosening of trade restrictions post-pandemic generated in the United States. increases revenue generated from international transactions. Stock Performance Highlights ❖ Replacing old aircrafts and increasing uses of new Current Price $281.34 technology to optimize the Express and Ground 52wk Range $103.40 - $305.66 operations while reducing their costs. Beta 1.032 Average Daily Volume 2.27 M Risks of Thesis: Share Highlights ❖ Low senior unsecured debt credit ratings potentially decrease future access to capitals. Market Capitalization $75.16 B ❖ Corporate tax hike adds more income tax expenses, Shares Outstanding 265.34 M lowering profitability. EPS (TTM) th $11.36 March 26 , 2021 ❖ Competition threats imposed by Amazon in the long P/E Ratio (TTM) 24.94 term. Dividend Yield 0.92% Dividend Payout Ratio (most recent) 23.05% Financial Ratios (2020) 12 Months FDX Stock Performance VS. S&P500 Cash Ratio 0.47 Asset Turnover 0.27 Debt/Equity 2.06 ROE 7.03% Operating Profit Margin 3.49% ROA 1.75% Dividend Payout Ratio 23.05% EPS Forecasts Source: Krause Fund Model 1 Executive Summary for their business segments, risk factors, and SWOT analysis. Our group of analysts recommends a BUY rating for shares The table below shows their forecasted growth rates between of FedEx. Our predictions show an upside of 20% over the 2021 and 2023. next five years due to higher online consumption. Moving Revenue Growth % 3y 2021E 2022E 2023E forward, we believe that FedEx will become upgrade their Forecast. FedEx Express 18.72% 5.63% 4.12% technology and become one of the most efficient package FedEx Ground 35.55% 8.25% 7.14% service providers. The recent merger with TNT Express in FedEx Freight 5.10% 7.69% 5.26% FedEx Services 31.25% 6.46% 3.03% Europe will also make them a global leader in parcel delivery Source: Krause Fund Model services in the years to come. FedEx managed to keep their We forecast all segments to grow between 3.22% and delivery percentage higher than expected at the beginning of 35.55% over the next five years. the pandemic and we predict their revenue to get stronger. Corporate Strategy Company Description The holding business model of FedEx allows their FedEx Corporation (NYSE: FDX) is a holding company subsidiaries to compete collectively, operate independently providing a portfolio of transportation, e-commerce, and while managing collaboratively to achieve the highest business services. Their subsidiaries operate independently overall long-term return on capital for their business as a but are managed under the FedEx brand. The company’s whole.1 FedEx competes collectively by representing principal segments are FedEx Express, including TNT themselves as one brand worldwide; segments operate Express, FedEx Ground, FedEx Freight, and FedEx Services. independently by focusing on their independent networks to The largest revenue segment is FedEx Express, comprising meet distinct customer needs; and they manage 1 54.33% of the whole revenue portfolio. Information related collaboratively by working together to sustain loyal to FedEx’s business lines is discussed in greater detail later relationships with their workforce, customers, and investors. in this section. In each of their sub-companies, FedEx focuses on making necessary investments in cost-effective, sustainable assets and technology to optimize long-term earnings performance and cash flow. Their portfolio-liked strategy also provides flexibility for their businesses to accommodate with corresponding macroeconomic conditions, gaining their own experiences of solving their market uncertainty and volatility. In 2020, FedEx concentrates on five key areas to sustaining their long-term success: e-commerce, business-to-business shipping, operational excellence, international profitability, and revenue quality.1 Firstly, their core Source: 2020 FDX 10k business operations are correlated with the growth of online Additionally, the Company Description will touch on shopping, which is accelerated by the COVID-19 pandemic. FedEx’s corporate strategy, forecasted revenue assumptions During this challenging time, FedEx Ground and FedEx Freight collaborate to handle the significant increases in e- commerce and large package volume, resulting in their boost 2 in interim revenues between June 2020 and February 2021.2 ❖ Continuing with the aircraft fleet modernization Secondly, business-to-business shipping accounts for the strategy by replacing oldest and least efficient majority of FedEx revenue, which the corporation aims to aircraft with Boeing 777 Freighter (“B777F”) advances their service delivery quality and speed as demand aircraft and Boeing 767-300 Freighter (“B767F”) rises. Thirdly, FedEx is working on enhancing operations aircraft to furtherly improve fuel efficiency and fleet while reducing costs by updating their businesses with better reliability. technology. Also, they plan to reallocate their investments to ❖ Launching FedEx Cares 50 by 50, their global accommodate the pandemic protocols and shifting consumer community engagement program to positively behaviors to improve revenue quality. FedEx reduced the impacting 50 million people by 2023 operation of some stores that belong to the FedEx Office FedEx Express segment, while purchasing more assets for their major The Express business, generating more than 50% of total segments, and health, safety equipment for the whole revenue in 2020, is the world's largest express transportation 1 business. Lastly, with customers in more than 220 countries company.1 It offers domestic and international shipping and territories, FedEx earns more profit internationally services for the delivery of packages and freight. The firm through their aircraft fleet modernization program, integration consists of three U.S. domestic overnight package delivery of TNT Express, and streamlined services provided by FedEx services and same-day services available all year round, Express to the global market. throughout all 50 states. In terms of international operations, FedEx Express provides deliveries in between one and five Here are some notable innovations that FedEx executed business days windows. In 2016, FedEx acquired TNT 1. during 2020 and early 2021: Express and integrated it with their Express segment to ❖ Expanding FedEx Ground residential delivery accelerate their European and global growth. TNT Express is operations to 7 days per week year-round for most stated to have lower-cost road networks and expertise related of the U.S. population, so there would be services to Europe, the Middle East, and the Asia market. available even during holidays and weekends. Management cites that in response to the COVID-19 ❖ Beginning testing of Roxo, the FedEx Same Day pandemic, they suspended our money-back guarantee for all Bot, in selected markets and collaborating with two FedEx Express services and implemented surcharges on the business partners to launch a pilot drone delivery international package and airfreight shipments to reduce service as a potential solution for enhancing last- service costs, getting more funds to supply safety equipment mile residential delivery. to customers and employees. ❖ Collaborating with Microsoft (Nasdaq “MSFT” @microsoft) to create FedEx Surround, which leverages data to provide near-real-time analytics into shipment tracking using the logistics network of FedEx and Azure, Dynamics 365 technology of Microsoft. ❖ Progressing the FedEx Express/TNT Express integration to improve their European ground network. Source: Krause Fund Model 3 Our team projects a growth period for Express’s revenue complex uncertainty and interconnectedness of the global between 2021 and 2025, based on the booming of e- market. The 2021 interim reports show their strong earnings commerce, TNT acquisitions, and FedEx’s aircraft fleet performance due to large domestic package volumes and modernization strategy. Our prediction of an 18.72% increase safety supplies, vaccine distributions.2 From 2022, we in sales of this segment is deduced from the positive financial predict this segment’s revenue will grow between 7-8%. results of the previous quarters of 2021.2 The pandemic Online shopping trends in North America will continue to drives the demands for Express services as well as results in rise, sustaining the demands for Ground services. favorable exchange rates for FedEx international business. We believe the recovery from COVID-19 from the second FedEx Freight half of 2021 and loosening travel restrictions will lead to a FedEx Freight Segment offers less-than-truckload freight healthy