Profitable growth channels
FedEx (FDX) is aggressively investing in automation, and this should help the company roll back excess capacities. Technology offers a more efficient operating plan for these carriers. Also, the express and parcel delivery industry players expect to bank on the booming pharmaceutical market, which transports goods worth $1 trillion. Healthcare logistics have above-average margins due to the niche know-how required to deliver the value-add services.
Forward price-to-earnings multiple
Forward PE (price-to-earnings) multiples represent the dollars payable today for every dollar of next year’s earnings per share. FDX’s current forward PE multiple is 13.2x, whereas the peer group current average forward PE multiple is 20.3x, which represents a discount of 35.0%. When compared with the S&P 500’s forward PE of 17.92x, FDX still trades a discount of 26.3%.
Historically, FDX’s operating margins have been considerably lower than that of UPS, and the latter’s cash flows have beaten FedEx’s over the past few years. FDX has also lowered its share repurchase.
On the other hand, UPS aggressively bought back stock in 2015, and the company’s board reauthorized UPS’s existing share repurchase program at $8 billion.
On the dividend front, UPS has either increased or maintained its cash dividend every year for 47 years. The current quarterly dividend of the company amounts to $0.78 per share, indicating a rise of 7% on a yearly basis.
On June 6, 2016, FDX announced that it would increase its dividend to $0.40 per share from $0.20 per share one year previously. However, the market reacted coldly to the rise.
Meanwhile, rising fuel costs were dragging FDX down, among the other integration concerns regarding its TNT Express acquisition. By comparison, unlike FDX, UPS maintains 6.5% alternative vehicles in its fleet of package cars. So any diesel price bounce can adversely impact FDX’s margins going forward.
FedEx Freight, which happens to be the company’s fastest-growing segment, also had a dismal fiscal 4Q16. Any headwinds associated with the US manufacturing industry should affect FedEx’s Freight segment.
Among well-known industrial ETFs, the SPDR S&P Transportation ETF (XTN) has a sizeable (43.2%) exposure to airlines. With holdings in both railroads (NSC) and trucking companies (JBHT), XTN has ~80% of its total holdings in transportation stocks. Notably, FedEx makes up 2.8% of XTN’s portfolio holdings.