NEW YORK, NY – DECEMBER 19: A FedEx worker unloads packages from a truck in the Financial District, … [+]
FedEx Corporation’s stock (NYSE: FDX) slid over 40% in 2 years, with the stock price declining from $242 at the end of 2017 to about $150 at the end of 2019. Furthermore, the stock price dropped in 2020 to $117 (as of 20th May) due to the COVID-19 pandemic, registering a cumulative decline of 52% since the end of 2017.
But how did this happen with FedEx’s revenue actually up 16% from 2017 to 2019? Well, there was a method to the madness – it was contraction of the company’s P/E Multiple. Turns out, FedEx’s P/E Multiple declined over the last few years from 17.4x in 2017 to 9.7x in 2019. That’s a solid 45% plunge. So why did investors revise the earnings multiple for FedEx like that? Our dashboard, ‘Why Is There A Mismatch In The Rate At Which FedEx’s Revenues And Stock Price Have Changed?‘, summarizes key factors that drove FedEx’s stock over the past 2 years.
What Changed For FedEx?
One big change – the company acquired TNT in 2016, but its integration has been challenging, and it is still under process. This has also weighed on the company’s earnings. The company has spent over $1.3 billion in this integration process between fiscal 2017 and now. To add to this, the company’s contract with Amazon for domestic U.S. delivery ended in August 2019, and it was not renewed. While Amazon was not a high-margin business for FedEx, the loss of business, among other factors, has impacted the company’s performance. The company did see steady revenue growth over the last few years, primarily led by increased yields at FedEx Ground and FedEx Freight segments. But higher fuel costs and purchased transportation expense led to a moderate decline in the company’s Net Income Margin from 6.2% to 5.9% between 2017 and 2019. A combination of these factors: margins declining 4.6%, while revenue increasing by 16% from $60.3 billion in 2017 to $69.7 billion in 2019, clubbed with a 1.5% decline in number of shares outstanding meant earnings per share (adjusted EPS) in fact grew from $13.87 to $15.57 over the same period.
Things have taken an unexpected turn in 2020 with the COVID-19 pandemic, and the global economy is feared to go into recession. It will also impact FedEx’s business, and investors realize the risk to future earnings growth. This explains the 22% decline in the stock price thus far in 2020, underperforming the broader markets, with the S&P 500 down around 12%. As a result, the P/E multiple dropped from 17.4x in 2017 to 9.7x in 2019, and to 12.3x currently, a decline of 29%.