FedEx’s debt level
FedEx (FDX) is a global integrated logistics service provider that competes with United Parcel Service (UPS). FDX operates in a highly capital-intensive industry where billions of dollars are spent on the acquisition of fleet and other transportation infrastructure. Companies with high levels of debt usually fare poorly in economic downturns. But, as the economy picks up, these companies are more likely to outpace their peers due to their low levels of debt. The air cargo delivery industry is somewhat cyclical in nature. The peak season typically occurs in November and December during the holidays.
In the span of ten years, FDX’s total debt went up from $2.4 billion in 2006 to $8.4 billion in 2015. However, during the same time, the EBITDA (earnings before interest tax, depreciation, and amortization) shot up from $4.5 billion to $7.4 billion. Though the debt has increased roughly four times, EBITDA has not even doubled at the same time.
In the last three years, FDX’s debt levels have almost doubled, though the EBITDA remained subdued. Investors should note that FDX operates a fleet of mostly aged aircraft, which has reduced efficiency and increased maintenance and repair costs for the company. FedEx’s long-term obligations are somewhat evenly distributed until 2019 and will fall slightly after that.
Standard & Poor’s has assigned FedEx a long-term foreign issuer credit rating of BBB1 and a rating outlook of “stable.” Moody’s Investors Service, another global rating agency, has issued FDX a long-term credit rating of Baa2. Investors should note here that in mid-2015, it had a “negative” rating outlook on FedEx, but as of March 24, 2016, Moody’s outlook has changed to “stable” from “negative” earlier.
Comparison with peers
FDX’s latest debt-to-EBITDA multiple is 1.13x. In contrast, UPS has a debt-to-EBITDA multiple of 1.4x. Yamato Holdings and TNT Express stand at 2.7x and 11.7x, respectively. You should know that FDX has entered into a definitive agreement with TNT Express to acquire the latter. YRCW and ODFL, other peers, are at 3.3x and 0.84x, respectively. Thus, FDX’s debt-to-EBITDA ratio is well balanced compared to the industry players.
Investors seeking diversified industry exposure can consider investment in the Guggenheim S&P 500 Equal Weight ETF (RSP). This ETF invests 0.22% in FedEx. Transportation-sector-specific investors can opt for the Industrial Select Sector SPDR Fund (XLI), which invests 2.4% in FDX.
FDX also mentioned fleet renewal as one of its top priorities in the presentation delivered on March 16, 2016. We’ll take a look at its capital expenditure and related trends in the next article.
1 Investors should know that ratings BBB/Baa2 are used as a different symbol, but convey similar meaning. It represents a default rate of 2.11%, far lower than BB/Ba2 and B/B2 grade ratings.