Get Ready for FedEx to Deliver

Barring bankruptcy, every stock decline eventually comes to an end. The bottom happens when the final bull throws in the towel and gives up hope. The analyst at Bernstein might have triggered that reaction for FedEx at 6:53 a.m. on Wednesday, when he lowered his rating on FDX from outperform to market perform (a.k.a neutral). I'm betting that FedEx's Wednesday decline to an intra-day, three-and-a-half year low of $137.78 was its final capitulation. By 4 p.m. that day, FDX had rebounded to $139.25. What a change from January of 2018, when everybody loved the stock at north of $274. Now, at almost exactly half-price, FDX has few fans left. Delve into the facts, however, and you might just want to get on board. Yahoo Finance shows that the average fiscal 2020 estimate now sits at $12.22 per share (the fiscal year ends May 31, 2020). Fiscal 2021 earnings per share, or EPS, are expected to rise to $13.96. At 11.9-times, this year's and 9.9-times next year's earnings, FDX is certainly inexpensive by historical measures. Yahoo's 12-month target price of $166.38 appears ultra conservative. Even so, achieving that very modest goal would provide a greater than 20% gain plus dividends from FDX's midday quote. What is FDX really worth, knowing that it's going through a rare, rough period? From fiscal 2010 through fiscal 2019, the shares typically fetched about 16.1-times earnings while delivering just about 0.7% in current yield. The current well-covered yield, at around 1.88%, is more than twice normal. The forward multiple on fiscal 2021 estimates represents a greater than 61% discount to its normalized price-to-earnings, or P/E. Note, too, that those profit projections assume relatively punk results over the coming 19-months. Management is busy cutting costs and improving efficiencies. Results for fiscal 2021 may very well surprise to the upside. A simple regression-to-the-mean valuation suggests an end of May 2021 target price near $225. In my world, a 65% or so total return over 19-months would be quite acceptable. The data below show us that FDX only traded cheaper than now one time during the past nine years. It hit 9.9-times trailing earnings on Christmas Eve 2018, when the stock bottomed at $150.50. Buyers back then got a quick chance at 32% gains, when FDX ran up to almost $200 last April. FDX's three should have sold moments (red-starred below) each occurred only when the shares were trading for above-average valuations. Independent research firm Morningstar saw FDX's Wednesday low as a buying opportunity. The firm assigned it a 4-star, out of 5, buy rating. Morningstar refuses to make year-ahead projections, but it does let us know that the stock's present-day fair value estimate is $190. Simply rebounding to that mid-range goal would provide a very comforting 37.6% gain plus any dividends earned while awaiting the move. Traders have short memories. The negative sentiment is belied by FDX's excellent long-term record. The table below shows great strides since 2010, despite this year's relatively poor results, included for fiscal 2020. The huge discrepancy between historical value created and share price performance sets up today's buyers with a classic catch-up situation where the stock price can surge to correct the imbalance. FDX shares showed previous periods of significant weakness in 2009, 2011 and 2016. All three sell-offs merely served to allow smart traders a chance to own this high-quality company at great price points. Was this week the final bottom? Only time will tell. FDX is so undervalued that it really doesn't matter. A year or two down the road, I expect the shares to be $200 to $300 again. Value Line's 2022-2024 estimated price range for FDX sits at $305 to $375. Buy the stock. Speculative players might also wish to purchase some Jan. 21, 2022 call options. The premiums look quite attractive. Who knows how high FDX could be given in the little more than two years until expiration day?

Get Ready for FedEx to Deliver

The FDX decline can't go on forever, and after its Wednesday lows, it's way too cheap to stay grounded.

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